What does "escrow" refer to in real estate transactions?

In real estate transactions, escrow refers to a holding arrangement managed by a third party. This neutral third party safeguards funds, documents, and other pertinent items (such as the deed) until all parties have fulfilled their contractual obligations. This ensures that neither the buyer nor the seller is at risk of losing their investment before the transaction is completed. The use of escrow helps facilitate trust between the parties involved, as it provides a secure means of transferring ownership and financial consideration.

For instance, when a buyer makes an offer on a property and the seller accepts it, the buyer may deposit earnest money into an escrow account. This deposit is held until the sale is finalized, at which point it can be applied to the purchase price. If the transaction does not go through due to contractual failures on the seller's part, the buyer is generally entitled to have their funds returned. Therefore, the role of escrow is critical in ensuring that the interests of both parties are protected during the process of completing a real estate transaction.