Written by True Tamplin, BSc, CEPF®
Updated on July 13, 2021
Define Escrow Account
The escrow account definition is a process by which two parties engaging in a transaction employ the use of an agreed-upon independent third party to hold the assets being moved until the obligations of both parties have been fulfilled.
This is often used in cases where there is uncertainty that one or more parties may be unable to meet their obligations under the contract.
Buying contexts in which escrow is a common service are real estate, mergers and acquisitions, large banking and internet transactions, and the acquiring of intellectual property.
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What is the Nature of an Escrow Account Relationship?
When two parties utilize an escrow service, the funds and assets being transacted are held by the third party until all of the obligations of the transaction have been met.
This facilitates the primary function of an escrow service: ensuring that both parties are held to their promises before any transfer of funds is made.
This helps maintain fairness and honesty in a financial agreement.
Here is a common use of escrow:
A buyer is interested in purchasing real estate, but only if the house first passes an inspection.
In this event, the buyer and seller might both wish to use an escrow service; the buyer places the funds in escrow, assuring the seller that they can close the purchase.
The seller can then fulfill their end with less risk of wasting time or money.
After the home clears the inspection and any other stipulations, the third party releases the escrow funds to the seller and the buyer receives the deed to the home.