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6 Situations Where You Hold Money in Escrow

Whether you’re a buyer or seller, you want to make sure that you are involved in a secure transaction. It’s important for each party to feel comfortable with the deal, especially when large amounts of money are involved. A seller wants to make sure that they are getting what they paid for and a buyer wants to make sure that they are getting the amount of money they were promised. 

Holding money in escrow is a great way to ensure this process goes smoothly. When you hire an escrow company, you deposit earnest money into the escrow account, and this is where the money sits until the deal goes through and both parties are satisfied. The earnest money ends up counting towards the sale price and goes to the seller. 

Escrow services are a legitimate method to add security and to help close a deal. There are many different types of situations in which you would hold money in escrow. The most common instance is in real estate – but there are several other types of business transactions and escrow accounts that apply. 

It’s important to be informed about the different types of transactions you can get involved in to hold money in escrow. This way, if you ever find yourself feeling a bit insecure about a deal, you may be able to request an escrow account be opened. Escrow agents act as referees to ensure both parties are playing fair. 

In today’s blog, we’re diving into the details of which types of situations you may find yourself holding money in escrow. 

holding escrow

1. Home Buying

Having an escrow account is a very helpful way to get through the home closing process, which consists of many sensitive elements. It can also be helpful after this process is over by helping you pay off your real estate taxes and insurance.

An earnest money deposit should stay in an escrow account to protect both the buyer and seller. Once the buyer puts an offer on the home and the seller accepts it, the earnest money deposit gets put in an escrow account. The deposit will be held in the escrow account until both parties close on the house, and will then go towards closing costs.

2. Monthly Payments 

After closing on a house, escrow accounts are mainly used to pay taxes and insurance. This works by applying for a mortgage. If you go through a mortgage lender to take out a loan in order to buy a home, you may end up using the money in your escrow account to help you with your monthly payments. 

You can make deposits in an escrow account with each monthly payment, helping to smooth out large annual expenses like a mortgage. With each monthly payment, your funds go toward your loan balance (principal and interest) as well as taxes and insurance. Those payments are often called PITI payments.

3. Rentals

When it comes to renters, escrow may be useful. Some states legally require you to place any rent withheld into an escrow account. While California does not have this law, it’s a good idea to do this in case your landlord tries to take you to court for unpaid rent.

Escrow accounts can help protect the interests of renters and settle disputes. Security deposits are a form of escrow, where you pay a sum of money (usually a month’s rent) up front to be released back to you once your lease ends and the property is left in the same condition it was when you moved in. 

When landlords fail to address renter needs outlined in the lease agreement (like the need for running water or heat), renters may be able to withhold rent payments. However, in some states, renters are required to deposit the regular rent payment into an escrow account. This protects both the landlord and the renter.

4. Goods and Services

Escrow is an option for almost any transaction where buyers and sellers want a “referee” to oversee payment. For major monetary transactions, you want to have a sense of security to give you the confidence to pursue the deal, especially if doing so online. If you enter into an agreement with a fraudster, and the money changes hands, there isn’t typically a lot you can do. 

You might need to reclaim any money should the goods arrive not as described or if there is some other issue related to the product or services you paid for – but if this isn’t handled online, you may be out of money or product. 

Online transactions are especially common situations where you can hold money in escrow. 

Like real estate escrow, online escrow protects the buyer from fraud and the seller from nonpayment. An online platform acts as the middleman for online product sales. The buyers send the money to an escrow service, such as New Venture Escrow, and we hold the money until the product is received. 

5. Private Capital

Escrow accounts are also common in certain private mergers and acquisitions where large companies acquire full or partial equity stakes in other companies. Prior to the deal closing, an escrow account is created where the money resides until all terms and conditions set in the private capital transactions are fulfilled by both parties of the deal.

6. Stocks

The stock market is a great way to make money, if you play it right. Did you know that stocks are often issued in escrow? In this case, while the shareholder is the real owner of the stock, the shareholder has limited rights when it comes to the disposal of the stock. For example, executives who receive stock as a bonus to their compensation often must wait for an escrow period to pass before they can sell the stock. In the corporate world, stock bonuses are a tactic used to retain top executives and other stakeholders.

Start Holding Money In Escrow Today 

Ready to put your money in the trusted hands of a New Venture Escrow agent? Our team of experienced members are ready to help guide you through the escrow process, so you can ensure a safe and hassle-free transaction. Whether looking into real estate, goods and services, private capital, and more, contact us today to get started on all your escrow needs. 

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