In almost every real estate closing, at some point, someone’s funds are held in escrow. What is escrow, and what purpose does holding money in escrow serve in a real estate closing?
Why Escrow Money is Used
Escrow is money that is being held for some other future purpose or some other contingent event. It is money that is not “earned” by either party but will be provided to one party or the other on the occurrence of a later event.
A common escrow purpose is to hold deposit money when a real estate contract is first signed. The buyer deposits money in escrow—but later, the buyer could get that money back if, for example, the seller were to default on, or breach, the real estate contract and should the deal fail to ever close.
The deposit money could also go to the seller when and if the closing actually does occur. But until you know what happens one way or the other, the money is held in escrow.
Future Contingent Events
Escrow can also be used for some continent events, that may or may not happen, even after the closing is finished. For example, assume a buyer purchases a home, but the garage is not up to code. The seller promises he will fix the problem, but of course, that repair will take a few months.
The parties can opt to close on the property, and the seller would put money into escrow. If the seller does what he promised—fixes the garage and brings it up to code—the escrow money will be returned back to him. If the seller does not do what he promised, the money in escrow will go to the buyer allowing him to make the needed changes.
In our example, the escrow money is “security” for the buyer, and thus the buyer can proceed with the closing, confident there is money there in case the seller should default on the promise.
This is just one example; there are other situations when the ability to put money into escrow for a later, contingent event, or to enforce a promise between the parties to take place post-closing, may help save a closing.
Drafting the Escrow Agreement
When parties do decide to draft a separate escrow agreement, that agreement is a separate contract independent from the original real estate contract. It must have terms and conditions so that whoever is holding the escrow money (the escrow agent) knows who to disburse the money to, on what conditions, and when.
The last thing parties need is to have a problem-free, flawless real estate closing, only to end up in court months or years later over a poorly drafted or ambiguous escrow agreement.
Need help with your real estate closing? Contact our New Jersey real estate and closing attorneys at The Law Office of Agnes Rybar LLC today with questions about buying or selling property