So you found your dream home, but you don’t have enough money to buy it right now.
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What is an Escrow Account?
Sadly, the seller doesn’t want to give you the home unless you give them the total amount in one go. You are worried that you will lose your opportunity to live in your dream home. What can you do?
You can approach a third party (an individual or a company) and have them buy your dream home on your behalf. This third party will hold onto your home while you are completing your payment. This contractual monetary arrangement is called an escrow.
The third party involved in the transaction is called the stakeholder, or “escrow” agent, while the third-party account that holds your money during the time of the arrangement is called an escrow account.
> An escrow account is a temporary holding for both parties’ goods and money until each party has fulfilled all contractual obligations involved in the transaction.
3 Benefits of Using an Escrow Account
Escrow is NOT a new concept.
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Conditional ownership funds have been around for at least 200 years. The word “escrow” comes from the Old French word “escroue,” which meant a piece of parchment that a third party held until the end of a contract.
Technology has made escrow services popular, accessible, and safe. If you have ever used a pay-later service to buy something online, you may have already seen the benefits of escrow.
Here’s how escrow can make your life easier—
1. Safer Secure Transactions via Escrow
The foundation of any monetary transaction is trust.
When you buy something, you expect and assume that the seller will follow through. There is always a risk for the seller.
- failing to deliver or
- withholding critical information or
- lapsing on contractual obligations.
Here’s how an escrow-based payment system can help—
If you are using an escrow to buy your home, the stakeholder will negotiate on your behalf with the seller on the terms and conditions of the transaction. This will protect you from any unfair conditions or terms in the contract.
The escrow provides a layer of financial protection to the buyer, seller, and lender, making transactions transparent and safer.
2. Automated Finances— Worry Less about Procedures
Escrow accounts are automated. You don’t have to worry about the terms and conditions being fulfilled. Forget the pain of having to double-check whether your demands are met.
Besides, the escrow agent is a neutral third party, which means that the agent ensures that both parties agree. All this makes for an efficient and smooth transaction.
3. Secrecy and Confidentiality– What makes Escrow Cool
The only people who know what’s in an escrow account are the people who are part of the
escrow transaction. This confidentiality combined with trust will give you a sense of freedom
when you are using escrow accounts.
2 Ways How Escrow can make Indian Real Estate Better
Escrows are becoming increasingly popular in Indian real estate transactions. Most of the time, this is because of the security escrow that is used for larger transactions. Estate (Regulation Here are two ways in which an Escrow Account can be used in the Indian real estate sector
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1. Escrow in Real Estate Development
Real estate developers may fail to deliver on their promises.
This is why the Real Estate (Regulation and Development) Act of 2016 has made it mandatory for real estate agents to store 70% of customer funds in an escrow account.
2. Escrow for Rental Deposits
A rental security deposit is an unavoidable part of renting in India.
Tenants are weary of homeowners who don’t return the security deposit.
Use an escrow account to prevent this from happening. Here’s how–
- Once you agree on the terms and conditions of the rental, create an escrow account.
- You(the tenant) can transfer the security deposit to the escrow account.
- In the agreement, you may have terms and conditions for partial withdrawal of the security deposit as per conditions.
- Once the property has been vacated by the tenant, the landlord will have to transfer the amount back.
Escrow in Real Estate, Escrow Possibilities in Indian Real Estate
The RERA’s rules about escrow make it a tool for building trust in the real estate industry.
The Real Estate (Regulation and Development) Act of 2016 mandates all real estate developers to get their accounts audited within six months from the end of the financial year.
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Escrow makes the builder-buyer agreement a win-win scenario for the buyer and the builder.
If you are a property buyer, the escrow guidelines mean that
- you have money to pay and
- you don’t lose money if the developer fails to deliver.
If you are a builder/developer having the escrow arrangement ensures that
- buyers have money to complete the transaction and
- you don’t lose money if the buyer backs out in between.
Indian real estate has long been labelled as an unregulated sector. Successive governments have been pushing for more transparency and symmetry between various stakeholders—a good example being the case of the tenancy regulations that many states have started to roll out. Escrow can create a healthier environment for real estate investment.
The 3-Stage Escrow Mechanism Explained: How to Transfer Money via Escrow
Let’s look at how an escrow agreement can be used to move money while buying a home.
Stage 1–Initiation and Earnest Money
Before transferring money via an escrow account, you and the buyer must agree mutually upon a purchase agreement. Once you agree to such terms and conditions, the agent will collect a down payment called earnest money.
Stage 2–Tracking Contractual Obligations
The escrow agent will act as a neutral third party and hold onto the earnest money and any personal and financial documents. The agent will track and verify receipts from both sides.
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Stage 3–Validation, Handover
When the agent has confirmed that the buyer has paid and the seller has sent the goods, they will give the goods to the rightful owners.
Escrow Dispute Resolution
If there is any disagreement between parties– the account will be moved to dispute resolution. The escrow funds will be dispatched based on the outcome of the dispute resolution.
Escrow vs Credit card and Pay Later
We are living in the golden era of digital finances.
Digital escrow, Pay-later and credit card technologies have brought transparency to financial transactions. The three are similar in the sense they make credit available to the buyer and improve the security of financial transactions.
While pay-later and credit card transactions are more commonly used for smaller purchases, digital escrow is more favourable for larger transactions–like real estate.
Another difference is that escrow transactions safeguard the interest of both parties – in the case of pay later, the customer receives the goods in advance and the customer only has to “pay later”. But in an escrow agreement, both parties receive their share only once the escrowagent has validated that both parties have fulfilled their obligations.
3 Things to do When You are in a Real Estate Escrow Agreement
Escrow is a useful financial tool if you are looking to buy a property securely. However here are something that you must keep in mind while using an escrow–
1. Pay Attention to your Credit
An escrow account leaves behind a trail of credit. How you make your escrow payments will have a permanent impact on your credit score–and so make sure your payments are done by the terms and conditions in the escrow agreement.
2. Prioritise Property Inspection
Ensure that your escrow agent inspects your property to ensure that your home is delivered to you in perfect condition. Have a professional home inspector inspect your home. Check if your water and electrical connections are of quality.
3. Sign Carefully
The escrow agent will hand over the promised goods to each party once they have ensured that each party has fulfilled their part of the contract.
You will be given detailed documentation and a checklist prior to the handover. Ensure that you read the documentation carefully before signing.
How can NoBroker Help
Escrow agreements are a relatively new phenomenon in Indian real estate. Technology has made using escrow accounts easy, but letting a third party handle larger monetary transactions can feel stressful.
NoBroker Property Legal Services Team will help you handle such transactions safely and securely.
If you are looking to buy your dream property from reliable builders, check out India’s largest collection of verified real estate projects at NoBroker.
FAQs
1. Is it possible to open an escrow account in India?
Yes, an escrow account facility is available in India. Escrow has been used for corporate mergers and acquisitions.
Now it is becoming a viable and safe choice for real estate transactions.
2. Are escrow accounts legal in India?
Yes, escrow accounts are legal in India. The RERA Act of 2016 encourages escrow transactions in real estate deals to protect the interests of both buyers and builders.
3. What happens to the escrow funds if one of the parties fails to hold up their end of the deal?
The goods that are part of the escrow agreement will lie in escrow (the escrow agent will hold onto them) until both parties have fulfilled their contractual obligations within the escrow period.
If one of the parties fails to deliver, the other party may forfeit based on what was agreed upon in the contractual obligation.
4. Does escrow protect the seller?
Escrow can safeguard all the parties involved in a financial transaction. In the case of a real estate purchase, the property will be delivered to the buyer only when the buyer has completed all terms of the contract as per the agreement.
5. Can I use escrow in a rental agreement?
Yes, you can use an escrow account to make sure that a rental agreement’s security deposit is handled in a responsible way.
As a tenant, an escrow rental agreement means that you don’t have to worry about the homeowner not returning the security deposit when you vacate the property.
If you own the house, an escrow can protect your interests if the renter doesn’t pay on time or doesn’t leave the house in perfect condition when they move out.
6. Will I get any interest on the money that I have put in the escrow account?
No, you will not be interested in escrow money.
The RBI specifies in its Schedule for Escrows that escrow accounts must be non-interest bearing.
