Escrow agreements are frequently used in real estate transactions. Title agents in the United States, notaries in civil law countries, and attorneys in other parts of the world routinely act as escrow agents by holding the seller’s deed to a property.
Payment is typically made to the escrow agent. The buyer can perform due diligence on his potential acquisition—like doing a home inspection or securing financing—while assuring the seller of his capacity to close on the purchase. If the purchase goes through, the escrow agent will apply the money to the purchase price. If the conditions set forth by the agreement are not met or the deal falls through, the escrow agent can refund the money to the buyer.
Stocks are often the subject of an escrow agreement in the context of an initial public offering (IPO) or when they are granted to employees under stock option plans. These stocks are usually in escrow because there is a minimum time limit that needs to pass before they can be freely traded by their owners.
How Escrow Agreements Work
In an escrow agreement, one party—usually a depositor—deposits funds or an asset with the escrow agent until the time that the contract is fulfilled. Once the contractual conditions are met, the escrow agent will deliver the funds or other assets to the beneficiary. Escrow agreements are commonly used in different financial transactions—especially those that involve significant dollar amounts such as real estate or online sales. Escrow agreements must fully outline the conditions between all parties involved. Having one in place ensures all the obligations of the parties involved are met, and that the transaction is conducted in a safe and reliable manner. An escrow agreement normally includes information such as:- The identity of the appointed escrow agent
- Definitions for any expressions pertinent to the agreement
- The escrow funds and detailed conditions for the release of these funds
- The acceptable use of funds by the escrow agent
- The duties and liabilities of the escrow agent
- The escrow agent’s fees and expenses
- The jurisdiction and venue in the event of a legal action