Throughout the home-buying process, a trusted and unbiased third party may be required to manage money while you execute certain transactions. Opening an escrow account is usually the last thing on your mind if you’re working on finalizing a large corporate transaction, such as a merger or a real estate investment. However, a qualified escrow agent can be invaluable in ensuring that everything goes smoothly. Let’s see the role of an escrow agent in a real estate transaction and their fees.
What Is an Escrow Agent?
An escrow agent (sometimes known as an escrow officer) is responsible for carrying out the provisions of an escrow agreement. Escrow occurs in a real estate transaction when a potential buyer of a home—or the buyer’s lender, generally a financial institution—makes an earnest money deposit in an account related to the agreed-upon price of the home. This money is put with the expectation that both the home buyer and seller would perform their agreed-upon tasks in order to close on a real estate property.
The escrow agent deposits the funds, together with the seller’s deed to the home, into an escrow account for safety. When the terms of the agreement are met, the funds in the escrow account are released and can be used to put down on a house. The escrow agent must have no inherent interest in protecting the cash and must fulfill equal obligations to both parties. Though most commonly associated with real estate transactions, escrow agreements are also utilized in company mergers, stock purchases, and acquisitions.
How Does an Escrow Agent Work?
Assume you and your spouse are seeking to buy a home. You’ve discovered the ideal property, made an offer, and signed the purchase agreement. You’ve also turned in your earnest money (a deposit toward the purchase) at this stage, which is subsequently placed in the escrow account.
The escrow agent will assist you in performing a preliminary title search, ensuring all of the lender’s criteria are completed, verifying all contingencies in the contract have been met, and handling payments from both you and the lender, among other things.
When the escrow agent is satisfied that everything has been performed satisfactorily, they can close the escrow, record the deed, and disburse all cash.
After the escrow agent has completed their work, you will have the keys to your new property, the seller will have received all of their funds, and the lender will have issued a new mortgage.
The escrow process has no specified time frame, but due to the complexities of closing, the average time to close is 49 days.
What Does an Escrow Agent Do?
The escrow agent is typically an attorney or a title business employee who is bound by the terms of the escrow agreement. Their responsibilities are largely defined by the specific agreement they are managing, however below are a few of the standard escrow agent responsibilities.
#1. Supervising the escrow account:
In a real estate transaction, the escrow agent is responsible for ensuring that the buyer’s assets are accurate and up to date.
#2. Holding the two parties accountable:
The escrow agent is in charge of ensuring that the parties’ obligations—such as home inspections and appraisals, or getting financing—are understood and met within the contractually stipulated time frame.
#3. Disbursement of escrow funds:
At a real estate closing, after all, contract obligations have been satisfied, the agent disburses monies to the seller and hands over the deed to the buyer. This is known as the “closing of escrow,” because it indicates that the transaction is complete.
Escrow Agent In Real Estate Transactions
Escrow agents are commonly involved with the sale or purchase of a property or other real estate. They may be referred to as title agents in some jurisdictions, notably the United States. In these circumstances, the escrow agent protects the property and reviews documentation to ensure that the terms of the sale are met on both ends, thus helping both the buyer and seller.
When it comes to home purchases and sales, an escrow agent may also be a title business. In such circumstances, the title firm holds the deed to the property in escrow until both the buyer’s and seller’s stipulations are met. The buyer can deposit the money for the purchase, or at least the down payment, with the escrow agent, which validates the transaction and reassures the seller until the last-minute closing terms are completed. Once all of the selling requirements are met, the escrowed sum is given to the seller and the property deed to the buyer.
In summary, whether the escrow agent is a company or an individual, their role is to function as a neutral, trustworthy third party in transactions between people who will never meet.
Is an Escrow Agent Necessary?
Legally, you are not required to use an escrow agent. However, it is a good idea to do so in real estate transactions. This is due to the fact that an escrow agent will perform numerous jobs in order to facilitate closure; without the agent, the procedure is exceedingly cumbersome, and mistakes are common. As a fiduciary, the escrow agent looks out for the best interests of both the buyer and the seller.
Although there are no hard and fast regulations about who must pay the escrow agent’s fees, the costs are typically shared by the prospective homebuyer and home seller. You can agree to have these fees paid in full by one party.
Who Does the Escrow Agent Work For?
In these types of transactions, escrow agents serve as neutral third parties. They service the contract and so work for neither the buyer nor the vendor. Their role is to ensure that the contract’s provisions are respected and that whatever they do benefits both the buyer and the seller financially.
What Should I Look Out For In an Escrow Agent?
There are two things to consider: accuracy and speed.
Because certain escrow transactions may need to be set up in as little as a single day, agents must be able to accomplish the necessary procedures swiftly. Among these tasks are:
- Choosing and implementing an appropriate escrow arrangement
- The escrow agreement is being negotiated.
- Obtaining the required compliance documentation
- Accepting deposits and investing them in accordance with the terms of the contract
- Tax reporting and disbursement
The most important factors to consider when selecting an escrow agent are asset safety, the amount of skill in handling a variety of escrows (including complex transactions), servicing capability, and cost.
When Do You Need an Escrow Account?
- Escrow is widely used in real estate deals for down payments or even to cover environmental cleaning costs.
- A cash holdback clause is frequently imposed as part of the underlying purchase agreement in mergers and acquisitions.
- Escrow can be used to hold court case settlements.
- When a seller substitutes one investment property with another (a so-called “Section 1031 like-kind” exchange), the proceeds from the sale of a like-kind property can be retained in escrow.
How Is an Escrow Account Kept Up to date?
Your escrow agent will put together a team of professionals with expertise in a variety of critical areas, such as:
- Product administration
- Processing of new accounts
- Escrow and legal services
These professionals will supervise the details and ensure that all components of the transaction are completed on time. Having an experienced staff on hand can be beneficial, especially in sophisticated, cross-border transactions that necessitate a higher level of protection.
Compliance can be particularly difficult, as the Patriot Act and other regulations now mandate complete disclosure of business and personal information. The lack of this documentation might stymie the process, causing it to be delayed or even cause the entire transaction to come apart.
Where and For How Long Is Escrow Money Kept?
The average escrow account has a lifespan of three to two years.
The monies are frequently invested in FDIC-insured accounts or vehicles such as short-term Treasuries or money market mutual funds. When determining where to keep your money, consider the credit rating of the financial institution where you’ll be putting it.
What Is the Size of a Typical Escrow Account?
It differs. Firms that specialize in complex escrow services often target accounts of $1,000,000 or more, with the largest escrows reaching hundreds of millions of dollars.
How Much Are Escrow Agent Fees?
Escrow agent fees often range between 1% and 2% of the purchase price of a home. That implies that if you’re looking at a $200,000 home, the escrow agent fees could range between $2,000 and $4,000. In addition, the escrow agent may charge a flat fee for its services. However, the actual cost of escrow agent fees will vary depending on the escrow business and the location of the residence.
Who Is Responsible for Escrow Agent Fees?
Buyers and sellers frequently discuss who pays escrow fees through their real estate brokers. There is no industry standard, but the most straightforward option is to split escrow fees between buyer and seller. Otherwise, negotiations may result in escrow services being paid wholly by the buyer or as seller concessions.
What Is the Difference Between an Escrow Agent and a Trustee?
If you’re familiar with trusts, you might think that escrow accounts used in real estate transactions are the same thing.
While they are similar in that money is held by a third party in both of these accounts until certain circumstances are satisfied – such as until the terms of a purchase agreement are met or until the grantor of the trust dies – there are several major variances that distinguish these two entities.
The trustee is the third party who oversees the money or assets within the trust in the case of a trust. This person’s fiduciary responsibility is limited to the trust’s beneficiary (the person who will receive the trust’s assets once the criteria are completed).
For example, if you create a trust that transfers ownership of your home to your daughter on her 18th birthday, she is the beneficiary, and the trustee’s fiduciary obligation is to her rather than to you.
However, keep in mind that, in the case of escrow, the escrow agent serves as a sort of neutral middleman between both parties involved in a transaction, such as a buyer and a seller. They have a fiduciary duty to both parties.
When it comes to real estate transactions, a lot of money can be exchanged from one party to another. A third party conducts the transaction and keeps the money safe throughout the process, operating in a neutral position in the interests of both the buyer and seller, to assist in avoiding risk and ensure all duties of the sale are met. This person is referred to as an escrow agent. When it comes to real estate transactions and the many steps in the process, it may be beneficial to consult with your attorney for further information and guidance on how to proceed.
Escrow Agent FAQs
Can you negotiate escrow fees?
The simple answer is yes – when buying a house, you may be able to negotiate closing costs with the seller and have them cover a portion of these fees.
How do I estimate closing costs?
Most lenders recommend anticipating your closing costs to be between 1% and 5% of the house purchase price when calculating your closing costs. If you buy a house for $300,000, you may expect your total closing fees to range between $3,000 and $15,000.
Can closing costs be rolled into mortgage?
In a nutshell, you can roll closing expenses into your mortgage, but not all lenders do, and the restrictions vary based on the type of mortgage you acquire. If you choose to roll your closing expenses into your mortgage, you will be required to pay interest on those charges during the term of your loan.