Escrow is a financial arrangement commonly used in transactions where a third party temporarily holds funds or assets until specific conditions are met. This mechanism provides security for both buyers and sellers, ensuring that neither party can access the funds until the agreed-upon terms are fulfilled. Escrow is widely utilized in real estate, online sales, and mergers and acquisitions, offering protection against fraud and ensuring smooth transactions. By using an escrow service, parties can establish trust and mitigate risks, making it a vital tool in various industries where large sums or sensitive information are involved.
Where Did Escrow Derive From ?
The word derives from the Old French word escroue meaning a scrap of paper or a scroll of parchment -this indicated the deed that a third party held until a transaction was completed.
How does Escrow Work ?
The escrow provider acts as middleman and ensures that the buyer and seller will do what they agreed to do. The Third Party known as Escrow Provider helps make the transaction safer by protecting the assets of the buyer and seller until both parties have met their obligations as per the agreement. Transactions where Escrow is used includes following activity
- The buyer and the seller agrees on the terms and conditions
- The buyer pays the amount into the escrow account
- The seller performs the service/ships the goods
- The buyer receives the same
- The escrow releases the amount in favour of the buyer
Example
- Suppose Mr Ram wants to purchase Property which is under construction. The Property is constructed by Paradise Builders Group and the flat cost is 1 crore. Here there are around 40 Buyers who wants to purchase flats in the same Project name “The Emporium”.
- The Paradise Builders Group here opens an account with SBI with the name of the Project .
- To this account Mr Ram makes payment . This account is called Escrow account which is managed by the third party that is SBI Bank.
- As the project develops the Builder receives payment through Escrow account as per the project cost and once the construction is completed the account gets closed.
- Here Ram makes payment as per agreement and builder receives payment as per agreement and the Third Party manages the fund through Escrow contract i.e. SBI bank sees to it that all terms and conditions as per the contract are met.
- In this case safety of both the parties are taken care by the third party Escrow and makes comfortable for both the parties to carry out the transactions.
