The Fundamentals of Escrow: What it is & How it Works in Real Estate Transactions in Jackson, Berkeley, Toms River, Tinton Falls, and other Monmouth and Ocean County Towns

If you ever bought a home or entered a real estate transaction in New Jersey, you may have heard the term “escrow.” Though it is a common term in the real estate world, escrow can have different meanings. In one sense, an escrow is an essential document that a third party holds for a buyer and seller until a specific act or series of acts occurs. For example, a real estate buyer may place a check for the home sales price balance until the seller completes repairs, an inspection, and moves out.

Escrow in the Context of a NJ Real Estate Transaction

An escrow is a legal relationship between a buyer and seller involving a neutral holding party or company to protect both buyer and seller. When buying a house, the escrow holder keeps money or deeds, for example, until both buyer and seller complete what they agree to do to close a real estate sale. Only when the buyer and seller fulfill their obligations, do the total purchase price and property deed with clear title go to the respective parties to complete a residential purchase. In that way, the buyer gets their property with all contingencies cleared.

Importance of the Escrow Agreement to Protect Parties

As a protection for the buyer, the buyer does not fear losing their earnest money or having problems fixed from their initial walk-through inspection of the house. Should the seller back out of the sale, the buyer gets their money back. By the final walk-through, all fixes and other contingencies are clear before the total purchase price passes to the seller. The seller receives the buyer’s earnest money if the buyer backs out of the sale. Typically, a buyer puts 1% to 2% of the sale price into an escrow to show they are earnest or serious about buying the property. If they back out without reason, the seller gets that money. If all goes as planned, the escrow company applies the earnest money toward the purchase price or closing costs.

Some escrows exist to protect lenders, like property taxes and homeowner’s fees escrow accounts. For instance, a lender wants to be sure that the homeowner secures their loan collateral, such as a house. Thus, they want to ensure the property taxes and monthly homeowner’s insurance premiums are paid, so they may require the homeowner to place those payments into an escrow managed by the lender but held in escrow by a mortgage servicing company or escrow agent. Then, the escrow holder pays the taxes and premiums from the escrow account as they become due. Payments or disbursements from the escrow go directly to the taxing agency and homeowner’s insurance company (N.J.S.A. 17:16F-18).

Escrow in a Nutshell

In one sense, escrow means a neutral party holder of money or documents. In another sense, the word escrow implies a period spanning from the offer to the closing. When a buyer makes an offer on a sale property, and the seller accepts the offer, probably after some negotiation, they sign a purchase agreement. That is the start of the escrow period. Soon after or simultaneously, the buyer places their earnest money in an escrow through an escrow company, title company, or real estate attorney. That marks the opening of an actual escrow. During that time, an escrow agent prepares the necessary documents to complete the sale, such as the transfer deeds and accompanying documents.

Before that, the escrow agent may check the title on the property with a title company to ensure there are no discrepancies involving the titled property owners and any outstanding liens. If there are problems, the escrow agent works with the seller to clear any title issues or liens so that the buyer obtains a clear title to the property. The agent may also collect tax records, official county maps for legal descriptions of the property, homeowners’ insurance information, and the loan balance to pay off any outstanding mortgage. The escrow ends at closing when there is nothing left to do to complete the sale. After the purchase price payment and the title documents transfer, the escrow is over.

Specifics of the Escrow Process You Should be Aware of Before Shaking Hands

The two terms are typically used interchangeably as money or documents held in escrow until the close of escrow. Thus, it is both a process and the items held by the third party. How long the process takes depends on the agreement between the buyer and seller. The contract between the parties includes the escrow closing time, usually 60 days. During that time, the escrow agent and seller work to gather the necessary documents and clearances, and the home appraisal to confirm the property value occurs. Also, the buyer can do a home inspection to assess the property’s condition.

Since escrows play critical roles in protecting your interests in a home sale or home ownership management after a sale, you want to make sure you decide on the right escrow holder you can trust. Working with a real estate attorney may ease your burden of finding the right escrow agent. Since real estate attorneys deal in real estate transactions frequently, they have connections in the industry and know who is trustworthy and reliable. Additionally, they can help you navigate the essential contracts you enter with a seller or buyer in a home sale or engage an escrow agent to facilitate the sale.

Contact Our Local Offices in Brick and Sea Girt for Help Managing and Protecting Your Investment Using Escrow

Real estate transactions are often complicated, with volumes of documents to prepare, retrieve or sign. You need a legal representative to ensure your legal protection against future problems or liabilities in a real estate purchase or sale. Real estate attorney  Peter Bronzino can help protect your interests throughout the purchase or sale process, from explaining your obligations under a real estate purchase agreement to helping you fulfill your obligations to receive your funds or property title from escrow.

Should the other party fail to keep their promises, our team at The Bronzino Law Firm can help you retrieve your funds from escrow or inform you about your rights to hold the defaulting party accountable if they breach a contract with you. Contact us at (732) 812-3102 to speak with an experienced real estate lawyer when you plan to buy or sell a house anywhere in Ocean and Monmouth County towns, such as Red Bank, Wall, Middletown, Sea Bright, Tinton Falls, Eatontown, and Freehold. We can help you navigate your course confidently and avoid the common pitfalls of real estate transactions that could spell costly consequences for your financial and personal future.