What is 'Escrow'

Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and other assets can all be held in escrow.

When parties are in the process of completing a transaction, there may come a time when it is only interesting to move forward for one party if it knows with absolute certainty that the other party will be able to fulfill its obligations. This is where the use of escrow comes into play.

For example, a company selling goods internationally wants to be certain that it will get paid when the goods reach their destination. Conversely, the buyer wants to pay for the goods only if they arrive in good condition. The buyer can place the funds in escrow with an agent and give irrevocable instructions to disburse them to the seller once the goods arrive. This way, both parties are safe, and the transaction can proceed.

Escrow transactions are also frequent in the real estate market and the stock market.

Escrow and Real Estate

Escrow accounts are used in real estate transactions so that the buyer can perform due diligence on his potential acquisition while assuring the seller of its capacity to close on the purchase. For example, an escrow account can be used for the sale of a house. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property deposits the payment amount for the house in an escrow account held by a third party. This assures the seller – in the process of allowing the house to be inspected – that the buyer is capable of making payment. Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and the title is transferred to the buyer.

Escrow and the Stock Market

Stocks, especially those of public companies, are often issued in escrow. This means that while the shareholder is the real owner of the stock, he is limited in his rights to dispose of it. For example, executives who receive stock as a bonus to their compensation often have to wait for an escrow period to pass before they can sell the stock. This is used as a tactic to retain top executives and protects the stock's market price.

BREAKING DOWN 'Escrow'

RELATED TERMS
  1. Bulk Sales Escrow

    A type of escrow agreement placed on the sale of inventory, business ...
  2. Third Party

    An individual or entity that is involved in a transaction but ...
  3. Annual Mortgage Statement

    An annual report sent to a mortgagor by the mortgagee's servicer ...
  4. Escrow Receipt

    A bank guarantee that an option writer has the underlying security ...
  5. Servicing Fee

    A percentage of each mortgage payment made by a borrower to a ...
  6. Good Faith Money

    The deposit of money into an account by a buyer to show that ...
Related Articles
  1. Personal Finance

    Understanding the Escrow Process

    Everything you need to know about this interim stage of buying or selling a home.
  2. Investing

    Understanding The Escrow Process

    Learn the 10 steps that lead up to closing the deal on your new home and taking possession.
  3. Personal Finance

    How to Sell a Car With a Lien

    Vehicle owners wondering how to sell a car with a lien on the certificate of title have four options to both remove the lien holder and transfer ownership.
  4. Tech

    Are Smart Contracts the Best of Blockchain?

    Smart contracts may be one of the best innovations to accompany blockchain development.
  5. Investing

    7 Must-Have Real Estate Contract Conditions

    It's a good idea to educate yourself on the not-so-obvious parts of a real estate contract.
  6. Investing

    7 Must-Have Real Estate Contract Conditions

    Buying a home can bury you in paperwork. But it’s worth your time to make sure your contract contains these seven important conditions.
  7. Small Business

    7 Steps To Selling Your Small Business

    Money in the bank and newfound free time make this grueling process worth the trouble.
  8. Investing

    The Ins And Outs of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  9. Investing

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
RELATED FAQS
  1. Who manages an escrow account?

    Managing an escrow account is a job for a trusted and experienced service provider. Discover the best personal finance solutions ... Read Answer >>
  2. How does the bank profit off of escrow accounts?

    Discover the truth behind escrow accounts and the bank's profits. Are these accounts worthwhile or just another way for the ... Read Answer >>
  3. Do landlords set up escrow accounts for their tenants' security deposits?

    Learn when and why landlords place rental property security deposits in separate escrow accounts to make sure the money is ... Read Answer >>
  4. Do FHA loans require escrow accounts?

    Here's why FHA mortgages require escrow accounts for property taxes, homeowners insurance and mortgage insurance premiums ... Read Answer >>
Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center