An escrow account is a contractual arrangement; this is where a third party which is either the stakeholder or escrow agent receives or disburses money or property for primarily transacting for the parties with the disbursement dependent on a condition.
It is also an arrangement made under contractual provision whereby an independent third party which is the bank receives and disburses money or document for the transacting parties. The third party does the disbursement depending on the fulfillment of the contractual agreement by the transacting party.
It is commonly used to support sale/purchase transactions, such as the purchase of real estate, reducing the risk between both parties to the minimum, thereby providing a mechanism that ensures trust and confidence.
The account diminishes risks for companies and private individuals alike, this includes risks in real estate, cars, shares, and other property purchase or sale transactions. It is important to note what the account is:
- It is a trilateral agreement between the buyer, bank, and buyer
- It allows agreeing on all terms necessary for securing a contract, including document deliveries, terms, and methods.
In an escrow transaction, the transacting parties (buyer, seller, and bank) signs an agreement on the necessary documents and the terms and condition as required to complete the deal.
Banks serve as the escrow agent, and act as impartial holders of the money and document, keeping the risk of such things as fraud to a minimal level for both parties.
Although it is used generally during real estate transactions, it can be used for other forms of transaction, these transactions for example are:
- Purchase of a second-hand car, where the money may be released at the end of a warranty period
- Deposit for rent of property, the money is released after the tenant moves out according to the condition of the property.
- Provision of construction services, all or part of the money may be released when the building or work is completed to the defined standard.
How does an Escrow Account Work?
- The financial institution creates the account, and the buyer/client transfers the price agreed for purchase or the amount for payment.
- The seller/contractor completes the relevant requirement and requites the document, submitting it to the bank either as an original document or evidence.
- If the document/evidence meets the requirement provided by the agreement, the buyer/client accepts them and the bank finalizes the transaction; this means, the bank transfers the money to the seller/contractor and hands over the original document to the buyer/client. The transaction is then finalized.
Steps to Set up the Escrow Account
- Fill out the Escrow account agreement preparation application either by internet banking or by visiting a bank branch
- The bank is responsible for the opening the escrow account
- The amount for the transaction is transferred by the buyer to the escrow account
- All necessary paperwork is done by the seller and delivered the document to the bank
- The document delivered is checked and verified by the bank, if the document meets the requirements of the agreement, the transaction is approved and effected by the bank, and the seller receives the money while the buyer receives the original document.