Ethical Homes

Literally, escrow is the act of putting something of value in the custody of an objective party who will release the item of value when certain conditions are met.

In legal transactions (and real estate transactions in particular), the need sometimes arises for one party (the grantor) to give something of value to another party (the grantee) after a condition is met; the way that this is usually handled is by giving the thing of value to disinterested third party (the escrow agent) who is usually paid a small fee by both parties and who is trusted to either transfer the thing of value to the grantee if the condition is met, or to return it to the grantor if the condition is not met. The legal structure that gives temporary responsibility for the thing of value to the third party is called an escrow; the act of creating the legal structure is also called escrowing the thing of value or putting the thing of value in escrow.

One common use of an escrow is in financial transactions where one or more of the items of value being exchanged cannot be easily transferred at the same time as the other items. If Joe has a widget, and Sam has a $10 bill, Sam can hand Joe the $10 bill at the same that Joe hands Sam the widget, and everyone is happy; if Sam has to write a check for $10, however, then either Joe has to trust that Sam’s check will clear and hand Sam the widget now, or else Sam has to trust that Joe will give him the widget once the check clears—or else Joe can put his widget in escrow, and Sam can give his $10 check to the escrow agent, and once the check clears, the escrow agent is trusted to give the $10 to Joe and the widget to Sam; if for some reason the check doesn’t clear, Joe gets his widget back, and neither party has lost anything.

For a $10 transaction, mutual trust is usually sufficient, but when dealing with more valuable things, like houses, it’s usually safer to use an escrow agent, and acting as an escrow agent is one of the many things that the settlement attorney does; for this reason, on the West Coast of the US many people refer to the settlement (or closing) as the escrow.