Have you ever seen the Seth Rogen movie Neighbors? If you haven’t, add it to your queue ASAP. It’s a fine piece of cinema about a couple buying a house, unaware that their new purchase is right next to a frat house. In Neighbors and its sequel, there’s a running joke that this supposedly “adult” couple doesn’t actually understand what goes into buying a house. In particular? Rogen’s character can’t wrap his head around the idea of “escrow,” and what it actually means.

And while it’s played for real laughs, there’s a seed of truth there! There are plenty of terms that we all tend to throw around during the real estate transaction process, often without actually getting a grasp on what they truly mean. Escrow is one such common term.

One potential source of confusion is that escrow is used a few different ways in real estate.

On the one hand, escrow refers to a specific step in the real estate transaction. Broadly speaking, escrow is a financial and legal instrument. The term refers to the concept of an impartial third party holding onto valuable items, funds, and documents during a transaction, and then ultimately disbursing them according to predetermined instructions. In real estate, this process typically begins when the buyer places their initial deposit of earnest money “in escrow” with an impartial agent, such as an escrow agent, a title company representative, or a real estate attorney. As Investopedia succinctly puts it:

“Placing the funds in escrow allows the buyer to perform due diligence on a potential acquisition. Escrow accounts also assure the seller that the buyer can close on the purchase… The seller can proceed with house inspections confident that the funds are there, and the buyer is capable of making payment. The amount in escrow is then transferred to the seller once all the conditions for the sale are satisfied.”

So that’s one part of the equation.

On the other hand, once this process has begun – i.e., the buyer has submitted an offer and the seller has accepted it, with terms discussed and agreed upon – many people now say that the home is “in escrow.” In some cases, people may casually use the phrase “in escrow” or “under escrow” interchangeably with the term “under contract” (though, technically, these two ideas aren’t one and the same). This is a crucial second meaning.

In short, this usage of escrow refers to the period where many moving parts must all come together, to take a home sale from contract all the way through to closing.

Once buyers and sellers go “into escrow,” there are many “to-do” items that must get crossed off the checklist, including:

  • Buyers’ inspections
  • Contract negotiations and renegotiations
  • Lender’s appraisal
  • Buyer attaining final approval from lender
  • Title search and inspection (including ordering a plat of survey, reviewing outstanding liens, evaluating easements, determining if there are any title disputes or issues, and so on)
  • Reviewing HOA documents and terms
  • Buyers purchasing insurance (i.e, property insurance, liability insurance, etc.)
  • …and more

At the conclusion of all of this, there comes a step known as the close of escrow. Here’s how real estate news and information site Inman describes this important piece of the puzzle for buyers and sellers:

The next step is the closing of escrow. This is when the escrow officer audits the files to be sure that all instructions have been followed and that everything is complete and looks correct. This is when a closing statement is prepared by the escrow holder… The final job of the escrow officer is to close the escrow. This is when the buyer and seller receive all closing documents, the money is distributed and all the paperwork is delivered to the correct parties. The seller of the property will receive [the amount] for the sale of the property, and the buyer will receive the keys to the property they just purchased.”

To wrap it all together? In some ways, it may help to think of escrow as a way to set down the instructions and conditions for a particular real estate transaction. The process is a way of assuring that no funds or property will be exchanged until all of the instructions for the transaction have been met fully. The third party escrow holder has the responsibility of overseeing this process, and safeguarding the important documents and funds until it’s time for disbursement, when all of the provisions of the escrow agreement have been satisfied.

It’s important to keep in mind that, although many real estate transactions will follow a similar pattern, the steps can be quite unique from case to case. It’s important to remember that the specifics of the process will vary based on details unique to your circumstances, including the property being exchanged and the goals and timelines of the parties involved.

One more thing to note? There is another way that the term “escrow” applies to real estate, and it has to do with your mortgage. Here’s how the CFPB explains the idea behind a lender escrow or impound account:

“An escrow account, sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses…

The money that goes into the account comes from a portion of your monthly mortgage payment. An escrow account helps you pay these expenses because you send money through your lender or servicer, every month, instead of having to pay a big bill once or twice a year. Many lenders require that you pay your taxes and insurance using escrow, so they can make sure that the bill gets paid. Your mortgage servicer will manage the escrow account and pay these bills on your behalf.”

Want to Keep the Conversation Going?

Real estate, and the laws and regulations underpinning it, can be complex even in the best of circumstances. This is particularly true in our home base of Chicago, where state, local, and city rules – including lease and rental agreement laws, security deposit laws, commercial development laws, and many more – all play a role.

The attorneys and staff of The Gunderson Law Firm specialize in helping individuals and businesses throughout Illinois with real estate transactions insightfully, promptly, and professionally. We’re here to field any additional questions or address any concerns that you may have, with specific answers for your unique situation.

Whether you are a couple wanting to buy or build a house, a corporation converting commercial properties to residential, or a commercial developer looking to change the Chicago skyline, The Gunderson Law Firm can help. Drop us a line or give us a call today to discuss our full range of real estate legal services, or set up your free initial consultation.