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Escrow account – is an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party (usually a bank) receives and disburses money or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfilment of contractually-agreed conditions by the transacting parties. It is commonly used to support sale/purchase transactions, such as the purchase of a real estate, reducing the risk between the parties to the minimum, and providing a mechanism which ensures trust and confidence.
The buyer, the seller and the bank sign an agreement, whereby they agree on necessary documents, terms and other conditions as required to complete the deal, along with any critical milestones along the way. An escrow agent – the bank, acts as an impartial holder of the money or documents, and in this way keeps the risk of such things as fraud to a minimum for both parties.
Although escrow accounts are generally used during a real estate transaction, in practice, it can be used in any transaction where there is a desire to reduce the risks to all parties, for example:
Purchase of a second hand car, where the money may be released at the end of a warranty period. Deposits for a property rental, where the money is released after the tenant moves out according to the condition of the property. Provision of construction services, where all or part of the money may be released when the building work is complete to a defined standard, or when defined stages (milestones) of the work are complete. How does an escrow account work? The bank creates an escrow account, and the buyer/client transfers the agreed purchase price or payment amount; Once the seller/contractor has the required documents or has completed relevent requirements – he submits documents or evidence to the bank; The bank informs the buyer/client, that the seller has submitted the documents/evidence; If the documents/evidence meet the requirements as provided for by the agreement, and the buyer/client accepts them – and the bank finalizes the transaction: transfering the money to the seller/contractor and handomg out the original documents to the purchaser/client. The transaction is then closed.