What does the term "escrow" refer to in real estate?

The term "escrow" in real estate refers to a financial arrangement held by a third party. It is a process where a neutral third party holds funds, documents, or other assets on behalf of two parties involved in a transaction. This is commonly used during the closing process in real estate deals, ensuring that the buyer's funds are securely kept until all terms of the sale are met and that any necessary documents are exchanged appropriately.

Escrow serves to protect all parties involved in the transaction, providing a safeguard that ensures obligations are fulfilled before the transfer of assets occurs. For instance, the buyer may deposit their earnest money into the escrow account, which is then released to the seller when the transaction is completed successfully. This process builds trust among the parties, as it ensures that funds or documents aren’t released until all conditions are satisfied.

Understanding this function of escrow is crucial for those in real estate, as it plays a significant role in facilitating smooth transactions and protecting the interests of the buyers and sellers.