Escrow in Real Estate Transactions: The Basics
Dec 03, 2024 | Realtor Resources | Share:
While escrow plays a vital role in every real estate transaction, much of this work happens behind the scenes. The escrow team manages and protects significant sums of money, maintaining security and accuracy throughout the closing process.
To better understand escrow in real estate transactions, we spoke with Ariel Preston, Escrow Manager at South Oak Title and Closing, about the escrow process and how it protects both buyers and sellers.
Understanding Escrow in Real Estate Transactions
In real estate transactions, escrow refers to a secure holding account managed by a neutral third party who receives, holds, and disburses funds according to the terms of the transaction. While mortgage escrow accounts are used by lenders to collect and pay property taxes and insurance, this escrow account serves a different purpose. Instead, it provides a secure way to handle the exchange of property and funds during a home sale.
When a property goes under contract, an escrow account is created. This account will receive funds from multiple sources at different times. Ariel Preston, Escrow Manager at South Oak Title and Closing says, “We receive all of the funds from the buyer and mortgage lender hold them in escrow. After closing, we divide these funds and distribute them according to the settlement statement. ”
The escrow account protects both buyers and sellers. The buyer knows their funds are secure and will only be released after the sale has closed. The seller is assured that the buyer has the necessary funds available before releasing their ownership rights. The escrow process also provides verification of funds and neutral oversight of all financial aspects of the transaction through strict security protocols that help prevent wire fraud.
The Escrow Process
The escrow process begins when a property goes under contract and continues until all post-closing tasks are complete. Throughout the transaction, different types of funds enter the escrow account: the initial earnest money deposit, the buyer's down payment and closing costs, mortgage funds from the lender, and in some cases gift funds from family members. Each type of payment must be properly documented, matched to the correct file, and verified upon receipt.
These funds are held securely until all closing conditions are met. The escrow company must adhere to strict guidelines regarding how long funds can be held. Preston says, “Every dime that we receive will ultimately leave the escrow account. We can only hold those funds within the period of the transaction, and we have 48 hours after the transaction closes to make sure all funds have been distributed.”
When it's time to disburse funds, the escrow manager follows the settlement statement precisely, distributing money to various parties:
- Paying off the seller's existing mortgage
- Transferring proceeds to the seller
- Paying property taxes and insurance
- Covering closing costs and other fees
The disbursement process includes verification steps and wire transfer processing time. While sellers often expect immediate access to their proceeds after closing, proper security measures and verification protocols take time to complete. This helps prevent wire fraud and ensures that funds are distributed correctly.
Each transaction concludes with a final reconciliation to achieve a zero balance in the escrow account. This means all incoming funds have been properly accounted for and all outgoing payments have been verified, with only the title company's fees retained. This reconciliation process provides an additional layer of verification that the transaction was completed correctly.
Security and Client Protection in Escrow
Wire fraud poses a significant risk in real estate transactions, with one in three transactions targeted by fraudsters. To combat this, the escrow department at South Oak has implemented comprehensive security measures to protect our clients’ funds.
Although they may sound instant, safe wire transfers take time. The verification and security protocols required for safe transfers require a little patience. Preston says, “Once a wire transfer is sent, it typically cannot be recalled or stopped." This makes upfront security measures essential since even a single misdirected transfer could result in unrecoverable losses.
“At South Oak, we have a multi-pronged approach for protecting customers from wire fraud,” Preston explains. “We never communicate wire instructions through email. We utilize Qualia Connect to maintain a secure communication portal with our clients throughout the transaction. We also use CertifID, which provides multi-step identity authentication and account verification before we transfer any funds.”
Escrow departments also operate under strict underwriter guidelines that require:
- Three-way reconciliation between banking records, software systems, and internal documentation
- Daily, weekly, and monthly monitoring of all transactions and uncleared disbursements
- Regular audits of security protocols and procedures
These standards ensure that every transaction receives consistent oversight and protection. While some security measures may extend processing times, they provide necessary safeguards for the substantial funds involved in real estate transactions.
Setting Client Expectations for Real Estate Transactions
Clear communication about the escrow process helps prevent misunderstandings and ensures smoother transactions. For buyers, funds must be received and verified according to specific timelines: earnest money deposits typically within 3 business days of contract acceptance, and closing funds at least one business day before closing. Personal checks cannot be accepted; funds must be in the form of a wire transfer or certified bank check.
South Oak offers several secure payment options, including online platforms for earnest money deposits, secure wire transfer systems with multi-factor authentication, and traditional methods such as certified funds.
When working with sellers, agents should emphasize that funds are typically disbursed within two business days after closing. This timeline accounts for required security protocols and wire transfer processing. Weekend and holiday closings require additional planning, as these days don't count toward the processing window.
Clients should also understand the verification steps required for wire transfers. While these steps may seem time-consuming, they protect against fraud and ensure accurate disbursement. The escrow department can provide status updates throughout the process, confirming when funds are received and when disbursements are complete.
Consider providing clients with a written timeline of the real estate transaction, highlighting key dates and requirements. This helps them plan for funding deadlines and understand when they can expect disbursements. Encourage clients to reach out to the escrow department with questions about payment methods or transfer instructions - this direct communication often prevents delays and ensures all security protocols are properly followed.
South Oak's Approach to Escrow
South Oak integrates escrow services with title and closing operations, providing comprehensive transaction management from contract to post-closing. This integration enables streamlined processing and coordinated verification at each step, with escrow managers working directly alongside title examiners and closing attorneys.
While security measures are our top concern, we understand the importance of timely disbursement. “Our escrow team works to process funds as quickly as security protocols allow, often completing disbursements faster than standard timelines when possible,” Preston explains.
The escrow department at South Oak provides multiple resources to support agents and their clients, including online platforms for earnest money deposits and secure systems for wire transfers. Our team is available to answer questions about payment methods, verify transfer instructions, and guide clients through security protocols, ensuring every transaction proceeds smoothly and securely.
When you partner with South Oak, you gain access to decades of experience in managing real estate transactions securely and efficiently. Contact your local South Oak office to learn more about our escrow services, or order a title and schedule a closing today.