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What is Escrow?

By Damir Wallener
Updated May 16, 2024
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Escrow is a way of transferring or exchanging property and/or money using a neutral third party. In many jurisdictions, escrow agents constitute a distinct profession with its own training and accreditation requirements. In other jurisdictions, such as Canada, these functions may be performed by attorneys. In either case, the process is covered by significant regulation and protection through the use of licensing and/or bonding.

The process of escrow is most commonly associated with real estate transactions. When a home or property changes hands, the seller of the property transfers the property title to the escrow agent. Similarly, the buyer either transfers funds or has a bank transfer mortgage proceeds to the agent. When all conditions of the purchase agreement are met, the agent assigns the property title to the purchaser and distributes the funds to the seller.

With the Internet age, escrow services have gone digital. Many online businesses allow geographically remote buyers and sellers to purchase goods and services from each other. With large purchases, the potential for fraud is significant. To deal with this issue, online escrow services have been established to provide a reliable third-party means of completing a sale. In response, fraudulent operators have increased their own level of sophistication and established illegitimate services, so it is vital that anyone using such a service proceed with caution.

Escrow can also be used to exchange non-tangible goods. In the sale of intellectual property such as software or industrial designs, a balance must be struck between how much detail is revealed by the seller while simultaneously confirming the legitimacy of the potential buyer. With each side opening its position to an escrow agency instead of to each other, everyone remains protected. Software escrow can also be used to hold source code in case a licensee runs into a problem the licensor won't or can't fix. If such a situation occurs, the agent can release the source code to the licensee, allowing it to fix the problem for itself.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By anon100552 — On Jul 30, 2010

For real estate deals in Canada, the money between the buyer and the seller is usually placed in a lawyer's trust account. The deposit is usually held in trust by the seller's real estate company. In the US, an escrow company is used to hold both the deposit and the remainder of the funds, and to transfer title once all the conditions of sale are met. In a way, they replace the real estate lawyer in a Canadian real estate transaction.

By anon57840 — On Dec 28, 2009

Is escrow same as "deposit" in Canada? (Deposit, $3000 e.g. from the buyer to the seller of the property when an offer is bought.)

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