What is an Escrow Agreement?

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Escrow Agreements are commonly seen in real estate transactions, although they should be used as a last resort.  Escrow agreements are generally utilized when there were outstanding PICRA items that could not be repaired/fixed/replaced prior to closing or when there were walk-through items that could not be repaired/fixed/replaced before closing. 

Essentially, an escrow agreement is an agreement signed by both parties, which sets forth a certain amount of funds that will be held in escrow, until outstanding work/repairs are completed.  The person/ entity who will be holding the funds is considered the “Escrow Agent”.  The money that is set aside is usually money withheld from the seller’s proceeds in the real estate transaction and is considered the “Escrowed Funds”.

Steps Prior to an Escrow Agreement

Before getting to the point where an escrow agreement is needed, the goal is to try and get the work done before closing.  If that is not possible, then we always encourage our clients to try and get an invoice for what the cost of work will be. 

If we can get an invoice from the contractor that is doing the work, we can include that cost in the closing disclosure and it can be a debit from the seller.  We will then hold on to that check until we receive word the work has been completed and then disburse the check to the contractor OR we can deliver the check to the buyer and then the buyer can disburse the check to the contractor once work is completed.

This way, we know a contractor is lined up to do the work, we know the amount of money it will cost for the work, and we will have the funds ready for the cost of work, made payable to the contractor.  If the above is not possible, then we will turn to drafting an escrow agreement. 

An Escrow Agreement Defines Duration of Work

Within the escrow agreement, we want to make sure that there is a duration of time in which the work has to be completed.  This way, it prevents the seller from dragging his/her feet.  In the event the work is not complete by the deadline, we like to include terms that state the escrowed funds shall be given to the buyer and the seller will waive any right to same. 

We can also include a clause within the agreement that states that upon mutual agreement of the parties, in writing, there can be an extension of time for the work to be completed.  Each transaction has its own unique set of circumstances, so the precise details of what should be included in an escrow agreement should be discussed with an attorney for your particular file.

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