I Have A Question
Hi everyone. This is my first post on the forum so pleeeeease be patient. I have been reading the post for a good week or two and I have tons of questions. I was wondering if someone could explain to me about an escrow account. What is it? When is it necessary to use? Who is responsible for opening one? Who's money goes into the account? I am very excited about investing but I know I still have a long way to go to learn about certain things. I am mainly concentrating on wholesale/flipping for now. Thanks in advance for your help.
An escrow account is an account that an independent third party controls. The purpose of the account is to insure that certain predefined conditions are met before the assets of the account are distributed.
For example, when I enter into a Sales Contract to purchase a property I demand that my earnest money is held in escrow. That way if the Seller defaults, I do not have to worry about my earnest money. In this event the escrow agent will automactically return my earnest money If there is a dispute the escrow agent will hold the earnest money until the dispute is resolved.
Thanks for the reply pspiers. So Is it always necessary to open an escrow account in every contract theat I lock up? Who's responsibility is it to open that account, the buyer or seller?
You need an escrow account when you want to insure an outcome before you give away your asset. In my previous example either my attorney or the sellers attorney/realtor holds the earnest money in thier escrow account. Most attornies and realtors have an open escrow account. Think of an escorw account as a safety measure. Another example, I have closed sales where the attorney held the deed in escrow until the buyer's check cleared the bank. Once we took a blank counter check for $150K. It cleared the bank and then the attorney released the deed.
You do not need an escrow account if there is no outstanding issues or conditions that need to be met. If you want to buy one of my properties tomorow show up at my attornies office with a cashiers check for the purchase price and she will give you a deed and title insurance. Done deal. No need to escrow anything. However, say I promise to repair the leaking roof, you may want to require me to escrow enough funds to make such a repair.
Hope this helps.
Escrow accounts serve many purposes and have many uses.
If you are a buyer, your earnest money deposit goes into an escrow account (if the seller has a real estate agent, the agent takes care of all this). You, as the buyer, have the right to designate your escrow agent, but most buyers default to the seller's real estate agency.
If you are a seller, and you demand an earnest money deposit, then your sales agent will open escrow for you. If you are selling on your own without the assistance of an agent, then you can open an escrow account yourself at your bank.
If you are a homeowner, the portion of your monthly mortgage payment that is meant for property taxes and hazard insurance goes into an escrow account maintained by your mortgage servicer.
If you are an investor doing a tax-deferred exchange, then your qualified intermediary opens and maintains your exchange escrow account.
If you are a landlord, state law may require that you keep your tenant's security deposits in an escrow account, and your state law may even require that you accrue interest on the funds on deposit.