The Escrow Enigma
Escrow is one of those words that most people simply don’t run across that often outside of a real estate context. To put it simply, in a real estate transaction, escrow is a neutral third-party repository in which the buyer places their funds for the purchase, and the seller places the necessary transaction documents to facilitate the transfer of ownership. This method is used to ensure that both parties are protected from the potential for fraud. In Oregon, the title companies that handle the title search and title insurance also provide this escrow service. The escrow officers are only able to release funds or documents relating to the transaction if they receive corresponding instructions from both the buyer and seller.
In a typical Portland real estate transaction, the escrow account is opened with the buyers earnest money deposit (there is another blog post discussing earnest money specifically). Once an offer has been accepted by the seller for a piece of property, the buyer typically has 3 business days to submit the earnest money in the form of a check or wire transfer, payable to the title company agreed to in the sale agreement. In addition to the earnest money, the down payment, and any financed funds will be deposited in the escrow account before closing, so that funds are ready to be disbursed on the actual close date. The deed to the property showing transfer of ownership is also deposited to escrow. Once the escrow officer has all the necessary documents and funds, has clearance to record, the new deed is sent to the county office for recording, and the sellers funds are released to them via check or wire transfer.
Think of escrow as simply a safe zone for the funds and important documents related to a real estate transaction. It is there for the protection of both parties, and provides a very valuable service.
Now, there is a second type of escrow account related to real estate. A budget mortgage is one in which the mortgage company opens an escrow account for a borrower's annual property taxes and insurance premiums. A home owner contributes to that escrow account through their monthly mortgage payment, and the mortgage company uses the collected funds to pay those annual expenses. It functions as a savings account, specific to those costs, and will be adjusted from time-to-time, as property tax amounts or insurance premiums change.
Hope you enjoyed learning a bit more about escrow, and if you have any questions, please don't hesitate to ask us!