When money goes into escrow during a real estate contract, it’s a signal from the buyer that they mean business, and a financial promise to the seller that the transaction will go through. Once an escrow account is opened, whose money is it? Is escrow your money?

The answer depends…are you the buyer or the seller? When an offer is accepted and a real estate contract is initiated, the buyer deposits a percentage of the negotiated price into an escrow account. Generally, escrow is about 1-2% of the purchase price, although it can be higher. The funds, also called earnest money, are held by a third-party with no connection or liability to the buyer or seller. Once all of the conditions of the purchase agreement are met, the escrow agent releases the funds to the seller, at which point the money becomes theirs.

If the conditions outlined in the contract are not met, the money remains in escrow until all obligations from all parties are fulfilled. For example, the buyer’s lender will require an inspection and appraisal, while the seller may have to provide concessions or repairs following contract negotiations. If these conditions of the purchase agreement are not met, the property can fall out of escrow, meaning the transaction is voided. Falling out of escrow can happen for a variety of reasons; sometimes the buyer’s financial situation changes and they can no longer qualify for a mortgage. Other times the home may not appraise for the purchase price, creating an appraisal gap that cannot be made up by the buyer. On the seller’s end, a home inspection can come back with expensive repairs that they cannot afford to make, or perhaps there is a lien on the home that prevents ownership from being transferred.

If the purchase agreement conditions aren’t met, the escrow account is usually returned to the buyer per the termination terms included in the contract. In today’s hot market though, some buyers include clauses in the contract that make the earnest money non-refundable as a way to entice the seller into accepting an offer.

In addition to escrow, there are other lump sums of money that change hands during a real estate transaction. A down payment is paid to the escrow company at closing to cover a percentage of the purchase price, while the rest comes from the lender. Additionally, there are utility transfer fees, title search and insurance costs, inspection and appraisal fees, and closing costs.

If you are party to a real estate transaction, whether as the buyer, the seller or a real estate agent, Clear Title is the top choice for escrow services. If you have questions about the escrow and closing process, or want to talk with one of our professionals about what sets Clear Title apart, call one of our Pensacola area offices.

Pensacola: (850) 361-4029

Pace: (850) 994-3838

Pine Forest: (850) 202-8518