Legal-Ease: What is escrow and closing?

Nobody wants to get duped or fooled in any aspect of life. In addition to embarrassment, getting taken advantage of in the context of a business transaction can also literally cost mountains of money.

Nevertheless, business transactions occur all the time. In those contexts, how do people ensure that they are not giving up something without definitely getting back what they have agreed to get back?

The answer, especially in the context of business and real estate transactions/contracts/deals, is escrow and closing.

Essentially, in a business transaction, one party is usually giving up money or some other asset in exchange for money or some other asset owned by someone else.

For example, let us presume that a business transaction is for the sale/purchase of a house. The house seller will give up the deed to the house in exchange for the money promised to be paid by the buyer.

People get nervous, though, because the buyer does not want to pay the money unless/until the buyer knows that the buyer will definitely get the deed to the house. Reciprocally, the seller does not want to give up the deed to the house unless/until the seller definitely knows that the seller will get the money for the house.

To avoid how drug dealers do transactions on television shows (the drug buyer counting the drugs and the drug seller counting money at one location at the same time, sometimes taking hours), the business world uses an easier alternative.

For instance, in a house sale, a seller and a buyer almost always agree to hire an unrelated “escrow agent” who collects all money, deeds and other items and then distributes all money, deeds and other items once everyone has provided what they promised to the escrow agent.

Thus, for a house sale, the escrow agent will receive money from the buyer and not distribute the money until the escrow agent receives the house deed from the seller. Similarly, the escrow agent will not give the buyer the house deed until the escrow agent has the money from the buyer.

As the middle-person, the escrow agent can ensure that everyone has provided what is necessary before anyone gets what is expected. In other words, escrow agents ensure that nobody is duped, fooled or (in the words of my grandfather) hornswoggled. Escrow is so common in the business and legal fields that the failure to understand escrow is often a telltale sign of a businessperson’s naiveté or lack of experience.

The completion of escrow is when everything is received and then distributed. That final distribution is called “closing” because the final distributions close/end the escrow.

Escrow agents for business and real estate transactions are often attorneys or title agents. Escrow agents technically work for both the buyer and the seller (or whatever two or more parties are a part of a contract, deal or transaction). Escrow agents have duties to the participants in the transaction, so escrow agents get paid to handle the escrow and closing.

Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.