There are real estate transactions in which certain liabilities could occur or “appear” after the closing. We go over using an escrow account for this.

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There are a few categories of real estate transactions in which certain potential liabilities could occur or “appear” after the closing. In this regard, I want to shed some light on how to handle these situations through the use of an escrow account, communicate why sometimes funds need to be withheld from the seller, and when and how are the funds subsequently disbursed.

In this regard, any deposit into an escrow account requires an “escrow agreement” to be executed by the parties and the entity holding the funds. I want to further note that the closing notary is not a party to this agreement.

The purpose of the escrow account I am referring to in this post is quite specific and different to the use of escrow accounts for a closing across the United States. The issue I want to cover is the need to withhold funds from the seller to protect the buyers from a potential condition that may require funds from the seller in the future.

Once a property is sold, the seller may elect to “travel the world” or go and find new adventures elsewhere. If the buyer of a property is confronted with a situation after the closing, which the seller is responsible for, the buyer may have some difficulties in achieving compensation from the seller. While this is not a common occurrence and not all possibilities can be predicted, there are some circumstances which warrant the use of an escrow account.

An example of the potential need for an escrow account after the closing are property taxes.

A seller of a property has to transfer the rights to the buyer with zero balance owed and with the records properly updated. Sometimes, a property is not appraised for property tax purposes and the taxes have not been paid up to the date of the closing. Under such circumstances, a buyer may elect to proceed with the closing anyhow.

The amount of the tax exposure would be estimated by the title insurance company, and the funds equivalent to this estimate would be withheld from the proceeds of the sale and deposited into an escrow account until the tax situation is cleared. The amount finally owed would be paid from the escrow funds and any leftover balance (if any) would be returned to the seller.

Another situation is a loan which has been paid off, but the mortgage was not timely cancelled by the seller. The buyer or his/her title insurance company would demand that a given amount of money be placed into an escrow account while the mortgage is being cancelled. Once the mortgage is successfully removed from the Property Registry, the funds held in the escrow account would be disbursed to the seller.

Regardless of the situation which warranted the use of an escrow account, one key element is noteworthy. The agreement to deposit the funds into an escrow account is by the parties in conjunction with the title insurance company who manages the escrow account. This agreement will manifest the requirements needed for the funds to be released in the future. Until those requirements are met, the funds will not be released.

The parties must understand that the eventual disbursement of the funds depends on: (1) full compliance with the requirements of the escrow agreement, and (2) a written consent by both parties to the entity managing the account authorizing the disbursement of the funds.