How Does the Escrow Process Work in Real Estate Transactions?

In the course of real estate transactions, funds are held in escrow in order to keep them secure and to protect the interests of the parties involved in the transaction. The process itself is governed by many rules, but it can be broken down into some basic steps.

What Is Escrow?

In it’s most basic sense, “escrow” refers to money being held by a third party (i.e. someone apart from the buyer and the seller) during a transaction. When someone buys a property, they place funds in an escrow account, and those funds are held there until the terms of the purchase agreement are completely finalized. Funds are released and the title to the property is transferred once the parties in the transaction fulfill the terms of the agreement.

Steps to the Escrow Process

The exact escrow process used will vary by state. In Illinois, the escrow process typically follows these steps.

1. Draft the terms

First, terms for the escrow agreement are set forth, such as how much is to be held in escrow while the purchase agreement is hashed out. Typically, a deposit of 3% to 5% of the property’s purchase price is used to prove the buyer’s commitment to the transaction.

2. Work out details of the transaction

Next, the buyer and seller work out the details of the transaction, such as the terms of the purchase agreement. In the meantime, the escrow agent holds on to any funds and paperwork used in the escrow account.

3. Initial deposit of earnest money

When a suitable offer has been made and accepted, an initial earnest money deposit (as it’s called) is made into the escrow account. That amount typically comes out to 1% to 2% of the property’s purchase price.

4. Second earnest deposit

After the property has been inspected and all other forms of due diligence have been completed, a second deposit is made, which may bring the total up to 20% of the purchase price.

5. Settle terms and transfer the title

After the terms of the purchase agreement are completely settled, all documents are signed, and the transaction is proceeding as agreed, the title is transferred to the buyer and funds are released to the seller.

In the event that the seller backs out, the deposit is returned to the buyer. On the other hand, if the buyer backs out, the seller might retain those funds if no legitimate reason is given.

Who Acts as the Escrow Agent?

Throughout this process, it’s important to have a trustworthy party act as the escrow agent. They need to be neutral during the process and must have the means by which to keep deposited funds secure. As such, they are licensed individuals who play no role in the transaction other than holding funds in escrow.

Often, attorneys (such as us at Hart David Carson LLP) act as escrow agents using dedicated accounts for holding funds. If you have any questions about escrow or related services, contact us today.

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