Escrow: What is it & Where did it come from?

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If you are in the real estate business, you already are familiar with the process called escrow. Hopefully you’ve experienced many profitable escrows. That is, when you left the office, you had a really big check in your pocket.

Escrow goes beyond real estate which is something most people don’t realize. To be precise, I looked up the term in Black’s Law dictionay, 6th Edition. Black’s definition says, “Escrow is actually a legal document such as a deed or money or stock or other property delivered by the grantor, promisor or obligor into the hands of a third person.”

Just as in real estate, this third person is commonly called an escrow officer. The escrow officer’s job is to hold the thing in escrow until the happening of a contingency or performance of a condition. Once this happens, the escrow officer will make delivery to the grantee, promisee or obligee.

Stuff We Already Know

If this sounds complicated or too complex, think of escrow as a system of document(s) transfer –no matter what the document(s)- a deed, bond, stock, funds or other property being delivered to a third person to hold until all conditions in the contract are fulfilled.

As real estate investors already know, it is the original contract, maybe with amendments, that dictates the terms of the escrow which is where you find the terms of the transfer. The contract, as we already know, is the agreement between buyer, seller and escrow holder. The rights and responsibilities of each party are set forth in writing and agreed to between the parties before anything can happen.

A Gentleman’s Agreement

In the old days, there was something called a gentleman’s agreement(GA). You could actually look at the GA as an escrow created by a simple handshake. It all boiled down to one person giving his word to another person and following through as agreed.

We still do that today but on a limited basis. Limited to people we trust or have had favorable dealings with in the past. For example, you sell an item to a friend who agrees to pay for it when you deliver it to his house. That sounds reasonable to you so you agree to the terms. This verbal escrow is completed when you deliver the sold item and he pays you.

Multiple Party Escrows

Obviously an escrow can involve multiple parties. Deeds and securities are two perfect examples of documents that can involve multiple parties. You may have been involved in a multiple party escrow. If you were, the successful completion of the transaction now depends on all parties fulfilling their obligations.

I had one such escrow and one of the parties didn’t live up to her part. That meant the remaining three parties had to step in and clean up the transaction. I would bet you’ve been there too.

Regardless, escrow is still escrow and carries with it rights and responsibilities that must be adhered to for the system to work properly.

If you remember Black’s definition, understanding escrow should be a piece of cake.

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