Escrow and Earnest Money FAQ – Fact or Fiction

escrow earnest money fact fiction real estate

“Escrow” is a hard-working word in real estate. It’s also the process (Or is it just a period of time? We’ll get to that in a minute) with a number of pitfalls for first-time home buyers and sellers. On the other hand, even experienced real estate agents have been known to believe some of the escrow and earnest money myths that circulate regularly. In this article, we’ll break down some of the “facts and fictions” you’re most likely to hear about escrow in 2020.

Fact or Fiction? “Escrow” refers to a bank account, not a period of time, so you shouldn’t say “in escrow”.

Fiction! Escrow is both – in fact, you could say that escrow is three things:

  • A type of bank account. An escrow account is a temporary account held by an escrow company. For the purposes of real estate transactions, the buyer can have their money held by a trusted third party. Meanwhile, the seller can proceed with the sale confident that the earnest money and down payment are waiting for them in the escrow account, and will be released to them when the deal closes (along with the rest of the funds, either from the buyer or their lender). 
  • A contractual agreement. Having money in escrow to buy a home means that the seller must complete their end of the bargain — getting the home inspected, potentially negotiate repairs, and having the title inspected as well. When we as real estate agents say a home is “in escrow”, we mean it is sold unless the buyer or seller backs out of the deal. If that does happen, you’ll often hear that a home “fell out of escrow”. 
  • A period of time. Usually, escrow lasts about 30-45 days. The word “escrow” is sometimes used to just refer to that length of time. “Let’s wait until escrow is over.” 

Fact or Fiction? You should always call to check money wiring instructions from your escrow company, even if you get an email direct from title or your agent.

Fact! Scam alert: In 2018 (the most recent year for which the FBI has published data), there were at least 11,300 victims of real estate wire fraud in the United States, and the total money lost was $150 million. Hackers can actually gain access to the email accounts of your real state agent, or mortgage, escrow or title officer, and ask you to wire money to an account – only it’s not the escrow account! With fraud on the rise, always call the person who seems to have sent the email to confirm the wiring account number. When you call, use a phone number you’ve used before, not one sent in the email. For more tips on avoiding escrow-related wire fraud, check out this Washington Post article.

Fact or Fiction? If you’re not using a real estate agent, it’s okay to give the earnest money directly to the seller.

Fiction! Never give earnest money directly to the seller. Not only is it probably illegal, but it’s a sure way to never see your money again. Buyers: Even if you’re opting to buy without a real estate agent, always use an escrow company. It’s the only way to ensure that you can get your earnest money back should you need to walk away from the deal — or if the seller fails to uphold their end of the contract. 

Fact or Fiction? Earnest money is the same as a deposit.

Fact! The terms “earnest money”, “deposit” and “escrow deposit” are used interchangeably. They are simply referring to the cash that a home buyer puts forward when they make an offer on a home, which gets deposited into an escrow account. The idea is to show that the offer is made in good faith. 

Fact or Fiction? Earnest deposits are due only when the seller accepts an offer.

Fact! When you and your real estate agent write up an offer, you include the amount offered in earnest. But only if the seller accepts the offer, do you need to write a check to the escrow company, putting your earnest deposit in this safe account until the deal closes. 

Fact or Fiction? Once earnest money is deposited, there’s no getting it back. 

Fiction. Most home purchase agreements have ways for the buyer and seller to back out of the deal and typically allow the buyer to get their earnest money back in full if the deal doesn’t come together. For example, most home offers are contingent on the inspection – if the home inspector uncovers a major flaw, the deal is off, and the buyer gets their earnest money back. Of course, the buyer can back out of the agreement at any point before the closing, and for any reason. But if that reason was not outlined in the contract, there is no guarantee of getting the earnest money back. 

Fact or Fiction? Escrow accounts aren’t just for real estate transactions. 

Fact! An escrow account is a temporary account that can be set up any time there are multiple interested parties involved in a large amount of money. You use one escrow account when you purchase the home — keeping the earnest deposit and down payment there until the deal closes. However, unless it’s an all-cash deal, most home buyers purchase the home using a lender. The home lender will often keep money in a new escrow account to cover the costs of the mortgage, for example, property tax and insurance. This is why mortgage payments are often referred to as PITI — Principle, Interest, Taxes and Insurance. So, just because you’re done buying the home, doesn’t mean you’re always done with escrow.

Fact or Fiction? The seller always pays the fees associated with the escrow account, title fees, etc.

Fiction! Either party can pay for these expenses. But local contracts and even local governments have their say in who pays what. In Oregon the seller’s have their own separate closing costs from the buyer that are set by the state, but others that are negotiable and set by local contracts and tradition. It just depends on the contract you work out through your real estate agents. All the more reason to find an agent who is a skilled negotiator!

Looking for a top buyers’ or sellers’ agent in Portland? Find out why we’re consistently a top 1% real estate team in the U.S. by giving us a call today!

February 7, 2020

Stephen FitzMaurice

Stephen FitzMaurice, Realtor is a top 5% real estate agent in the U.S. A Principal Broker in Oregon, Managing Broker in Washington, he has been licensed since 2003 for residential real estate sales. Call his team in Oregon at 503-714-1111 or in Washington at 360-345-3833.

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