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

In real estate transactions, "escrow" refers to a neutral third party holding funds or documents until certain conditions are fulfilled. This process ensures that both parties are protected during the transaction. For instance, when a buyer makes an offer on a property, the earnest money deposit might be placed in escrow. The funds are held securely until all contractual obligations, such as inspections or financing arrangements, are completed. Once those conditions are met, the escrow agent will release the funds to the seller and provide the buyer with the necessary documents to complete the transfer of ownership.

This function is crucial in maintaining trust between the buyer and seller, minimizing the risk of either party defaulting on the agreement. By using an escrow service, both parties can ensure that their commitments are honored before any funds or documents change hands, which contributes to a smoother closing process.