What Is Escrow?

How Escrow Protects Parties in Financial Transactions

What Is Escrow?
Escrow is a legal concept describing a financial agreement whereby an asset or money is held by a third party on behalf of two other parties that are in the process of completing a transaction.

Escrow accounts are managed by the escrow agent. The agent releases the assets or funds only upon the fulfillment of predetermined contractual obligations (or upon receiving appropriate instructions). Money, securities, funds, and other assets can all be held in escrow.

- Escrow refers to a neutral third party holding assets or funds before they are transferred from one party in a transaction to another.

- The third party holds the funds until both buyer and seller have fulfilled their contractual requirements.

- Escrow is associated with real estate transactions but it can apply to any situation where funds will pass from one party to another.

- Escrow can be used when purchasing a home and for the life of a mortgage.

- Online escrow has been on the rise as a way to offer secure online transactions for expensive items, such as art or jewelry.

Understanding Escrow

Escrow is a financial process used when two parties take part in a transaction and there is uncertainty about the fulfillment of their obligations. Situations that may use escrow can involve internet transactions, banking, intellectual property, real estate, mergers and acquisitions, law, and more.

Consider a company that is selling goods internationally. That company requires assurance that it will receive payment when the goods reach their destination. The buyer, for their part, is prepared to pay for the goods only if they arrive in good condition.

The buyer can place the funds in escrow with an agent with instructions to disburse them to the seller once the goods arrive in a suitable state. This way, both parties are protected and the transaction can proceed.