In this article, we’re answering “What is an escrow account?” In short, an escrow account is a financial arrangement where funds are held by a third party.
However, there are important nuances, disadvantages, and a wide range of applications that should be understood before using an escrow agent.
We will dig into each of these considerations below while also answering common questions we receive about escrow accounts.
This article is part of our series on banking basics, ranging from opening different types of bank accounts around the world to understanding how various aspects of the banking system operate.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is an Escrow Account?
- What Are the Advantages of an Escrow Account?
- What Are the Disadvantages of an Escrow Account?
- Types of Escrow Accounts
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
What Is an Escrow Account?
An escrow account is a financial arrangement where funds are held by a third party on behalf of two transacting parties. The third party, known as an escrow account, holds funds in accordance with the escrow agreement. Escrow funds are then released from the account when specific conditions are met.
Not surprisingly, escrow accounts are used in industries where unknown parties engage in high-value transactions. The most common example of this is a real estate escrow account, where the escrow agent holds funds on behalf of the buyer and seller of a property.
In real estate escrow, the escrow account disbursement takes place after all of the conditions of the transaction are met. Conditions are typically outlined in the purchase agreement for the property. These conditions include basic steps like title search and financing, and can also include requested repairs and other requirements.
Of course, real estate is just one example of an industry where an escrow account is commonly used. There are many other industries that require escrow services as well, not to mention the support of sophisticated escrow holders.
We will take a look at the types of escrow accounts below. But, first, we will discuss the advantages and disadvantages of escrow accounts that everyone should be aware of.
What Are the Advantages of an Escrow Account?
The main advantage of an escrow account is that it provides security to two unrelated and unknown parties based on an agreed-upon framework for completing a transaction. However, there are additional advantages of escrow, which include:
- Providers security and trust
- Offers risk mitigation
- Protects the seller’s interests
- Offers the buyer assurances
- Supports dispute resolution
- Manages the flow of funds
- Complies with legal and regulatory requirements
Of course, while there are many advantages, there are also disadvantages of escrow that should be considered.
What Are the Disadvantages of an Escrow Account?
The main disadvantages of an escrow account include the cost of the service and the additional complexity that it can add to the completion of a transaction. However, there are additional disadvantages that should be considered as well, including:
- Potential delays it introduces
- No access to funds held in escrow
- Additional complexity in dispute resolution
- Funds held in escrow for extended periods
- Reliability and professionalism of the agent
- Interpretation of escrow instructions
- Escrow security
Needless to say, it’s important that you choose an escrow agent that is reputable, will hold your funds with a trustworthy financial institution, and ideally comes highly recommended.
Now, let’s take a look at the common types of escrow.
Types of Escrow Accounts
The following are a few of the most common types of escrow that are used by both individuals and businesses.
Real Estate Sales Escrow
A real estate escrow account is an account where funds are held until all conditions are met in a purchase agreement.
Acquisitions and Mergers
An M&A escrow account typically holds a portion of the purchase price to cover various expenses, such as post-closing adjustments, indemnification claims, and unresolved issues.
Construction Escrow
A construction escrow account holds funds for a project until specific milestones are met, at which point the funds are released per the escrow instructions.
Issue of Shares
In addition to cash distributions, escrow can also play an important role in the distribution of shares in a company. For example, escrow agreements related to the issuance of shares can include parameters around control, governance, lock-up periods, release triggers, and more.
Do You Want Our Free Non-Resident Banking Guide?
Sign up here to receive our Free Non-Resident Banking Starter Guide and weekly updates on the best account opening options available:
Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into this topic. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
Who Owns the Money In an Escrow Account?
No one owns the money in an escrow account. Instead, the money is held by the escrow agent on behalf of both the buyer and the seller, until the specific conditions of the escrow agreement are met and distribution of funds can take place.
Can You Withdraw Money From Escrow Accounts?
No, you cannot withdraw money from escrow accounts. You can withdraw money in escrow when the specific conditions of the escrow instructions are met. When the conditions of the escrow instructions are successful, the selling party receives the funds. When the conditions of the escrow instructions are not successful, the contributing party usually receives the funds.
How Does Escrow Work in Buying Real Estate?
In buying real estate, escrow works as a trustworthy method for two unrelated and unknown parties to complete the transaction based on agreed-upon conditions for closing the transaction.
Do You Want Help Opening Bank Accounts?
If so, you can get access to GlobalBanks IQ in just a few clicks.
GlobalBanks IQ is our flagship international account opening solution. It gives you instant access to the…
+ Expert insights on which banks to choose & why
+ Step-by-step reports to open accounts in the best banking hubs
+ GlobalBanks international bank database & detailed bank profiles
+ Tried & tested banks for high-risk, offshore, & non-resident clients
+ Plus, get YOUR most pressing bank account opening questions answered by our team!
And “yes!” GlobalBanks IQ helps foreigners and non-resident individuals open bank accounts.
In fact, GlobalBanks IQ even helps non-resident, foreign & offshore entities open bank accounts.
Use the link in our menu above to learn more about GlobalBanks IQ. Or, contact us directly with any questions!
