What does "escrow" refer to in real estate transactions?

Escrow in real estate transactions refers to the arrangement where a neutral third party holds funds or documents on behalf of the buyer and seller until all conditions of the transaction are fulfilled. This process serves to protect the interests of all parties involved.

In an escrow agreement, the escrow agent will hold the earnest money deposit, purchase agreements, title documents, and other necessary paperwork until the transaction is ready to be finalized. This means that neither the buyer nor the seller has sole control over the funds or documents, which mitigates the risk of either party taking advantage of the situation before terms are met. Once all parties meet their agreed-upon obligations, the escrow agent will disburse the funds and documents to complete the transaction.

Understanding this concept is crucial in real estate, as it ensures a level of security and trust during the often-complex process of buying or selling property.