For many home buyers, the purchase of a home is perhaps the largest and most important investment they will ever make. As such, real estate transactions are not your typical, run-of-the-mill processes. There is no simple exchange of money for a home in a real estate transaction. Many times, the actual exchange is contingent on contract terms being met by both parties. There is an important aspect of the real estate transaction that not many people invest a whole lot of time in getting to know: escrow. This often familiar but sometimes misunderstood word is the process of depositing funds into a bank account by an escrow agent to be payable to the home seller once all of the contract terms are agreed upon and followed through. Escrow works to benefit both the buyer and seller in a real estate transaction. The third party sees to it that all contract terms are met for the benefit of the buyer, while also ensuring the seller that the buyer indeed has the fronted the money required for the purchase, and under the escrow agent’s direction, will be kept safe and secure until the exchange finally occurs.
Trust Vs. Escrow
In acting as a non-biased third party protecting the interests of all parties involved, the escrow agent is often considered a trustee in the transaction. Despite the terms trust and escrow being used interchangeably, there is actually quite an important difference between the two. The escrow agent is an impartial and independent party from both the buyer and the seller in real estate. The agent simply holds money, documents and other property based on terms outlined in a contract. In essence, the agent works as a proctor on behalf of the contract itself, making sure everything is followed before allowing the deal to proceed. A trust account works in quite a different way. These types of accounts are usually used for one of two purposes. The first being an account that is opened by a trustee to hold trust funds payable on the occasion of certain terms being met such as a death in the family or a marriage. Sometimes trust funds are also created to hold “in trust” a sum of money that is payable when services are rendered in the future. A popular example of this is an attorney who is held on retainer. The funds used to pay the attorney are usually held in trust until the attorney completes a service to warrant that payment. While trust and escrow operate similarly in terms of banking, the key difference between the two lies in the way responsibilities are outlined for the third party “trustee” in each case. An escrow agent serves as a fiduciary for both the buyer and seller, with duties assigned as outlined by the agreement between the two. A very narrow, limited relationship. In a trust, the agent’s role is broader and more flexible. The trustee’s duty is to take care of the assets for the benefit of its beneficiary above all else, which can entail a number of different tasks.