What Is Escrow and How Does It Work?

What Is Escrow and How Does It Work?

by Mike W

An escrow is an agreement between buyers and sellers as to how and when monies will be transferred. Escrow services act as a third party to oversee the transfer of monies between buyers and sellers. In general, the buyer will pay all or part of the purchase price to the escrow service. The money is held by the service until the seller has carried out his or her part of the contract. When all conditions have been met, the money will be transferred to the seller. If there is any dispute between buyer and seller, the escrow service will act as mediator.

Why use an escrow service?

An escrow service provides protection to both buyer and seller. For example, if the buyer does not receive the purchased goods, he or she will be able to get the money back. Likewise, if a seller ships goods, he or she does not have to worry about the buyer being unable to pay the amount due, as the buyer will already have transferred to amount to the escrow service.

What types of transactions are done using escrow services?

Any type of transaction involving exchange of goods or services for money can be made using escrow services. The higher the amounts of money involved, the safer it is to use an escrow service. Since the biggest financial transactions most people will make involve the buying and selling of property, those who are planning to do so should consider using an escrow service.

Property transactions can result in quite complicated contracts. They are also different to many types of sales or purchases since they involve transfer of title. In general, transfer of title and transfer of funds occurs simultaneously. It can be much easier to conclude this type of transaction using an escrow service.

What happens if a dispute arises?

Both parties to the escrow will have provided the service with instructions, and the service will seek to act on those instructions. Sometimes, these instructions may be conflicting. The escrow service will attempt to resolve differences. In the event that the seller has failed to fulfill his or her obligations, the escrow service will refund the monies paid to the prospective buyer. In some cases, both parties will agree prior to the contract that the escrow services will have the authority to adjudicate should a dispute arise.


Fees for escrow services can vary. Some services will charge fixed fees to both parties. Others will charge a percentage of the amount in escrow, with the charge being divided between buyer and seller. It is advisable to fully understand the fee structure before engaging an escrow service.

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