Escrow Account
An escrow is a financial arrangement in which two parties hire the services of a third party, known as an escrow agent (who is not the Buyer or Seller), to hold money or assets for them in an escrow account until both parties have fulfilled their contractual requirements.
The term ‘escrow’ originates from the French word ‘escroue’, which means a scrap of paper or a parchment scroll; this indicates the deed that a third party holds until a transaction is complete.
The escrow agent aids in the transaction’s safety by safeguarding the Buyer and Seller’s assets until both parties have fulfilled their obligations.
Escrow is commonly associated with real estate transactions, but it can be used in any scenario where funds are transferred from one party to another. With real estate, escrow can be used when purchasing a home or for the life of a mortgage. The use of escrow has been on the rise as a way to offer secure transactions for high-ticket items, such as stocks, art, jewellery, antiques or intellectual property like software source code.
Escrow Transaction Flow
1. Buyer and Seller agree to the terms and conditions of the transaction.
2. The Buyer deposits funds into the escrow account.
3. The escrow agent informs the Seller that money has been deposited into the Escrow account.
4. Seller ships the product to the Buyer or performs the requested service.
5. The Buyer receives the product or service.
6. The escrow agent releases funds to the Seller from the escrow account.
Key Points:
1. An escrow is a financial agreement in which a neutral third party (the escrow agent) controls payments between two parties and only releases the funds involved once a contract’s terms are met.
2. The escrow agent temporarily holds money, paperwork, or other assets for a transaction on their behalf in an escrow account.
3. Escrow is commonly used in real estate and high-value online transactions.
4. An escrow account helps minimise fraud and is very useful in the transfer of intellectual property from one party to another.
