What is an escrow account?

[ecis2016.org] When an account is opened to enable a third party to keep money or assets in its custody till specified conditions regarding a transaction between two parties have been fulfilled, it is known as an escrow account.

Those planning to invest in new houses, often hear the term ‘escrow account’ and its merits. Considering the significance of escrow account and the impact it has on homebuyers, it becomes imperative for greenhorn buyers to have a clear understanding of this term.

You are reading: What is an escrow account?

Escrow meaning

According to the Oxford Languages Dictionary, escrow means ‘a bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled’.

What is an escrow account?

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Escrow account meaning

For any transaction to take place, at least two parties need to be involved. One provides the service or goods and the other pays for the service or goods. For more clarity, we would refer to the service provider as the taker (of money) and the buyer of these services as the giver (of money.)

An escrow account comes into picture when a third party, referred to as escrow agent, is involved in a transaction with a view to keep it safe and secure for both the parties. In simple terms, an escrow account is a bank account under the control of a third party.

An escrow account is a legal-financial arrangement under which a third party holds and controls funds of assets, for two parties involved in a transaction and releases it in the name of the taker after fulfilling all terms and conditions mentioned in a pre-fixed agreement.

An escrow account can hold assets like money and securities. Opening an escrow account is a complicated process as all banks do not offer these services.

Also read: How to become a successful real estate agent in India?

Escrow account benefits

An escrow account makes a transaction safer for both the parties – seller does not have to worry that a buyer would not make payments and the buyer does not have to be anxious about not getting the promised goods and services despite making the payment. This concept is extremely helpful and used in the real estate sector.

Escrow account in real estate sector

Under provisions of the Real Estate (Regulation and Development) Act (RERA Act), 70% of the advances received from homebuyers for a housing project is deposited in an escrow account, managed by a scheduled bank in India. Similarly, 70% of the loans taken from banks for this housing project should be kept in this escrow account.

The money lying in the escrow account has to be used only for land purchase and construction of the housing project. This ensures that the builder does not use advances taken from buyers for other activities, an often-used practice that led to large-scale project delays and insolvencies.

While allowing a builder to withdraw money in proportion to the percentage of completion of the project, strict provisions are made in RERA to scrutinise his activities. Basically, the escrow agent disburses money from the escrow account to the builder after all conditions in the builder-buyer agreement have been met.

So, the account of the builder has to be audited by a chartered accountant every six months to ensure the money for the project is being used for the same purpose.

With clearly stated deadlines and pre-conditions, an escrow account leaves no room for speculation for both parties, thus, making any transaction less prone to scams and frauds.

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Escrow account: FAQs

What is the purpose of an escrow account?

The purpose of an escrow account is to protect buyers against delays in project deliveries and sellers against payment defaults.