What is Escrow? Understanding Escrow Accounts for Home Sales

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If you’ve ever bought or sold real estate (or even thought about it), you’ve probably heard to term “escrow.” But what is escrow? For many home buyers and sellers, it’s a vague financial concept.

In reality, escrow is a helpful part of many traditional home sales. It keeps money secure during the transition from one home owner to the next and can provide some serious peace of mind.

Let’s talk about what escrow is, who needs it, and whether or not it’s safe to sell a property to someone without using an escrow firm.

Escrow Basics

Escrow is the practice of enlisting a third party to hold on to something valuable (in the case of a real estate transaction, money) while two other parties work out a deal. When you’re buying a home, your good faith money is typically held in escrow while the deal is worked out. During the inspection process, and while other concessions are being sorted, an escrow company keeps money safe and unspent. Your escrow company may also confirm the availability of lender funds. Your escrow will “close” once the agreed upon price of the home has been paid by the buyer and transferred to the seller’s account, and all paperwork is signed to transfer the title of the home.

Why Escrow Protects You

The escrow process helps buyers and sellers in different ways. For buyers, giving money to an escrow firm means you know that if the deal falls through — you’ll get your good faith money back. No negotiating with the seller or risking that they have spent the funds and “need some time to get it back to you.” For sellers, having an escrow firm hold on to good faith money means you know it exists. A potential buyer can’t swear they’re good for the cash, then say they don’t have it later. In some cases, when a buyer has been pre-approved for financing, the loan may be released early to the escrow company to ensure a fast closing. Basically, both parties are helped by an escrow company because they know the funds in question are safe and sound with an impartial entity until the deal is ready to close.

When Escrow is Used

Escrow is used in most home sales. In many states, it is required when a lender is involved. The escrow company can evaluate the availability of funds and remain neutral, thereby reducing the number of complications. Once a home sale goes through and the escrow funds are released to the seller, the buyer may have other ongoing escrow arrangements with their mortgage lender. For instance, your lender may require you to put your property taxes into an ongoing escrow account, which they will transfer to the appropriate entities when your periodic tax payments are due. Escrow may also be set up for mortgage insurance and other common costs. This ensures you never fall behind and bakes the fees into your monthly mortgage payment for your convenience.

Can You Sell a Home Without Escrow?

It’s not impossible to sell a home without escrow, as long as your buyer pays in cash. When there is not a financial institution involved, escrow is not mandated. When an investor like California Family Homebuyers purchases your property, we can often close as fast as one week without escrow or contingencies. If you’re interested in selling fast, give us a call today to see if we can buy your Sacramento area home! We purchase properties in all sorts of conditions: plumbing problems, nearing foreclosure, long-term rentals in not-so-perfect condition, etc. We’re not afraid to put in hard work on a home, so you can get out now without making major repairs!

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