Escrow or an escrow account—also known as an impound account or a reserve account—is a legal document that transfers possession or ownership of a legal document or property to a third party who is not a party to the underlying transaction that the escrow is intended to secure.
For example, escrow or an escrow account may be used to secure a transaction for the sale of real property (a warranty deed held in escrow) or for a loan to purchase real property (a deed of trust transferring ownership to the escrow).
Escrow or an escrow account might also refer to a bank or other account that holds money or other property (earnest money) while the parties to the underlying transaction are in the process of completing the transaction and fulfilling their contractual obligations.
An escrow agreement requires the escrow or escrow agent (a person or entity) to hold a document or property in trust for a specified amount of time or until the occurrence of a certain condition (full payment) or until both parties to the underlying transaction have fulfilled their contractual obligations—at which time the escrow agent is to hand over the document or the property to the grantee (buyer of real property) or the mortgagee (lender for purchase of real property), for example.
An escrow is like a trust account in that the escrow agent holds the document or property in trust for the benefit of another person and not for the benefit of the escrow agent. Although the person or entity that holds the property in trust under the terms of an escrow is often referred to as an escrow agent, they are not an agent with authority to act on behalf of and bind or obligate a certain person (a principal) as an agent is traditionally empowered to do under a state’s common law (court opinions or case law).
In Texas, an escrow or escrow account is commonly used in real estate transactions to hold funds or documents until the completion of a sale or fulfillment of contractual obligations. The escrow agent, which can be a title company, attorney, or other designated third party, acts as a neutral holder of these assets. Texas law requires that the escrow agent must follow the terms of the escrow agreement, which dictates the conditions under which the assets are to be released to the appropriate party. This ensures that the buyer's earnest money is protected during the transaction process and that the seller does not transfer the title until all conditions are met. The Texas Department of Insurance regulates title insurance companies and escrow officers, setting standards for escrow transactions. Additionally, the Texas Property Code provides legal guidelines for the creation and execution of escrow accounts in real estate transactions. It's important to note that while the escrow agent holds assets in trust, they do not have the traditional authority of an agent to act on behalf of either party outside the specific terms of the escrow agreement.
