How Does Escrow Work?

Escrow: What You Need to Know


Escrow is an agreement in which a trusted third party holds funds during the completion of a specific financial transaction. When we apply this to real estate, once a purchase agreement has been signed between a buyer and seller, an escrow agent or escrow company will typically take a certain amount of money from the buyer. This is usually called earnest money or an earnest deposit, and is negotiable, especially in commercial real estate transactions

How Much Earnest Money is Required?

For small residential real estate transactions, earnest money may often be between 1% and 3% of a home's selling price. However, in very hot markets, this could increase to as much as 5-10% of the selling price. For commercial real estate, earnest deposits can vary widely; for deals that are expected to close incredibly quickly, or properties that require a lot of work from the buyer, it may be possible for the buyer to negotiate an earnest payment of $1-- but for typical deals, the amount could be significantly more than that. 

Once the deal is closed, the earnest money will be returned to the buyer, and may go toward the downpayment on their property. If the buyer leaves the transaction, depending on the terms of the contract, they may not get all their money back. However, if the seller leaves the transaction, the buyer will usually get a full refund. 

What Happens While Your Deposit is in Escrow

While your deposit on the property you want to buy is in the escrow account, a variety of things will typically take place, including: 

  • Property appraisal: Usually paid for by the buyer, the property appraisal is required by the lender to make sure they can get their money back if they ever need to foreclose on the property. 
  • Title search/verification: During this process, a title company looks through all relevant local, state, and federal records to determine if there are any competing claims, liens, easements, or other legal issues that could affect the property's title

When the deed to the property is signed off to the new owner (and the title is legally transferred) the escrow process is over. To learn more about the closing and escrow process, contact the experts at Florida Title Company today for a free consultation. 

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