Purchasing a new home is usually the most significant investment an individual will ever make. And whether you’re a first-time homebuyer or you have purchased multiple properties before, the process never seems to be crystal clear and simple to understand.
Take escrow and trusts, for example. The terms are not exactly interchangeable; however, when it comes to a real estate transaction, they can serve a similar purpose. So, what is the difference between escrow and a trust?
Because there are so many risks associated with it, money should never change hands between a buyer and a seller in a real estate transaction. This is where escrow comes in.
In most cases, the exchange of money during a sale is contingent upon terms having been met in the sales contract. This generally involves one or both of the parties, so money is held in an escrow account until all contingencies have been satisfied. It is a safeguard to ensure that both parties uphold their ends of the bargain, so to speak.
Once the contract terms are 100% agreed upon, escrow will pay out the funds to the home seller from the escrow account. Escrow also acts in good faith on behalf of both the buyer and seller to ensure that the contract terms are met, and also that the buyer has the appropriate funds to close on the property. Escrow is the process of keeping that money safe until the final exchange of monies occurs.
The escrow company acts as an unbiased, third-party throughout the transaction for all involved parties, which is why the escrow agent is often considered a trustee. You may have heard the terms “escrow” and “trust” used interchangeably, but they actually are not the same at all.
Your escrow agent is impartial and works independently from both the buyer, seller, and the involved real estate agents. Simply put, they are a bank of sorts, acting as a conduit to ensure that money, documents, and all other aspects of the sales contract are satisfied before closing.
On the other hand, a trust account operates quite differently, and are generally used for one of two reasons. Commonly, the account is opened by a trustee to hold trust funds payable on the occasion of certain terms (like death or marriage, for example).
Another reason one might elect to use a trust is to hold “in trust” a sum of money that is payable when services are rendered in the future. A great example of this is an attorney who is being paid on a retainer. In this instance, the funds used to pay the attorney are held in a trust until the attorney satisfies the client’s needs and requires payment.
When it comes to banking, the terms “escrow” and “trust” operate pretty similarly. However, the difference is how the responsibilities are outlined for the third-party “trustee” in each instance.
In a real estate transaction, the escrow agent acts as a fiduciary for both the buyer and the seller, and the scope of the relationship is somewhat limited. By comparison, an agent’s role in a trust is much more flexible and broad. They are usually tasked with taking care of the assets in order to benefit the beneficiary above anything else.
For assistance with all of your escrow needs, please contact us. It would be our pleasure to assist you.