WHAT IS ESCROW? WHY IS IT IMPORTANT???

Question

- In your own words, explain escrow.....- Why is it important, how do i set it up in a bank....-New To investing... THANKS! HELP!!!

Chris Mason · Answer

Simplest terms, escrow is merely a neutral 3rd party who operates based on instructions from those involved in the transaction, typically those instructions are in the form of a contract that both parties have signed. Let's use a non-real estate escrow example, drugs always make for fun metaphors. Suppose I'm a drug wholesaler who buys from importers, and you're a retail drug dealer who operates a few street corners.I show up with my 20 pounds of drugs, you show up with your $10,000 to buy it. We both agree to this.We exchange. I count the money and feel that I am shorted. You weigh the drugs and feel you've been shorted.We proceed to shoot each other and the results are on the evening news tomorrow.Suppose we have a non-real estate escrow officer. Suppose I'm a drug wholesaler who buys from importers, and you're a retail drug dealer who operates a few street corners.I show up with my 20 pounds of drugs, you show up with your $10,000 to buy it. We both agree to this.The escrow officer demands that we put the agreement in writing and both sign the contract. We hand her the fully signed contract. I hand the 20 pounds to the escrow officer. You hand your $10,000 to the escrow officer.She weighs the drugs and counts the money. Tells us both that we're short - there is only 19.5 pounds and $8500 in escrow. The transaction does NOT balance!She tells us that neither of us are getting ANYTHING until she either has a) the agreed upon amounts in escrow or b) gets a fully executed addendum to the contract specifying 19.5 pounds for $8500 or c) gets a fully executed addendum cancelling the transaction or d) it goes to binding mediation or a court to determine the outcome, at which point she will do whatever the mediator or court says to do (I'm sure you can see why IRL drug dealers don't use escrow officers, heh).You and I work something out because that is the ONLY way that either of us are getting ANY money or drugs. No one gets shot, because no matter what happens with the shooting, the escrow officer still has all our stuff. We have to make HER happy or we're both screwed (let's pretend you can't shoot escrow officers in my imaginary world that I'm making up for this example).In real life with real estate escrow officers, sometimes they end up looking like the bad guy because they hold everyone accountable to the contract and want everything in writing. Also in real life, my imaginary escrow officer above was a "she" because the overwhelming majority of real estate escrow officers are female for whatever reason.

Anthony Wick · Answer

@Charlie MooreIf you can avoid escrow, then do it. It’s merely your mortgage company hanging on to your money for free until it’s time to pay property taxes or insurance. My investment mortgages are escrow free. I pay my own taxes and insurance when it’s time. This allows me to earn money on my money until those payments are due every 6 months. The only “down side” is if you’re terrible putting money aside and suddenly find yourself short on funds when taxes are due. Of course, if you’re that person you really should not be investing in real estate anyway.

Stanley Bronstein · Answer

@Charlie Moore I wouldn't put a percentage on it. I can't speak for the entire real estate world in general.However, it's used on 100% of the deals I would do and my clients would do.

Ken Nyczaj · Answer

@Charlie Moore finding a great title company to walk you through the processes is priceless. It's one of the first relationships I built as my outer team and it has made me a lot of money and has saved me from bad deals.

Pathik P. · Answer

@Stanley Bronstein In that case would escrowing taxes and insurance only apply if you didn't have 20% down payment? Like PMI. For traditional/conventional loan situations, as a buyer, do I have to find the title company and escrow company or is that an obligation of the seller? (Assume we both have to agree upon the company) is there a responsible party for finding the company?

Stanley Bronstein · Answer

@Anthony Wick I think @Charlie Moore is talking about the escrow process as part of the sale / purchase process.I think you're talking about escrowing for the payment of taxes and insurance.

Charlie Moore · Answer

@Stanley BronsteinEscrow is used in 99.99 percent of American real estate deals. Correct?

Stanley Bronstein · Answer

@Charlie Moore - @Chris Mason explain things pretty well. It's not exactly how I would have explained it (grin), but his example gets the point across quite well.Escrow protects all the parties involved.One additional aspect is the escrow company (in real estate deals) is quite often also a title insurance company (or affiliated with a title insurance company) and they will be conducting title examinations on the property and ultimately issuing title insurance when the deal is completed.