A wide variety of steps are required to buy and sell a home. Among them, establish a contract where both parties agree and set an amount payable by the buyer. The process from negotiating a house to acquiring the same one supposes a great risk that one of the parts can resign.
This idea of stopping the process right in the middle and losing time or money is a fear between both parties; to end the insecurity and to carry out the process with confidence, the escrow account was born.
An impartial entity, the lawyer, manages this type of account; its role is to hold the money and important documents of the property and is transferred right after signing the contract. We made this guide for you to answer your question “what is an attorney escrow account” and all the others that arise from it.
What is an escrow account?
An escrow account is a type of account used in buying and selling a home. It is managed by the attorney, who is considered an impartial agent, to ensure that the money and important documents – title deed and contract – are in the hands of a person outside the process. This type of negotiation is also known as trust, and its main objective is to maintain security and confidence in the process.
Trust is an important factor in the process because it ensures that a neutral party not involved in the transaction is in charge of holding the documents and funds for the payment of the house. It also helps make the fund’s transfer timing more secure because it has the process in place if one of the parties defaults on the contract. Another factor is that it ensures that no money is transferred between the buyer and seller personally.
For this process to occur, three individuals must be present: the buyer, the seller, and the escrow agent, who may be a real estate attorney or a mortgage broker.
How does escrow work?
The escrow of funds and documentation works according to the following premises:
- The buyer and seller enter into a purchase and sale contract where they agree to all clauses
- Both parties open the escrow
- The documents are sent to the escrow account by both parties
- The buyer’s earnest money is deposited into the escrow account
- The impartial agent follows up on all the dates established in the contract to make sure they comply with the clauses
- The neutral agent coordinates a day for both parties to sign the closing documents. At this time, the seller places the property in the buyer’s name
- The agent receives the records from the lender and the funds
- The agent sends the funds to the seller’s account and delivers the documents to the buyer
As with all activities involving money, certain legal issues may arise while using an escrow account. The attorney or impartial agent is entrusted with the most important possessions to arrange the exchange: the money and the documents. This person must do everything possible to keep the funds and papers safe; consequently, these are some of the problems that may arise:
Market the transaction funds with personal money
It is illegal and completely reportable for an attorney to transfer funds to a person or law firm account. Must only use the account chosen for such purposes; otherwise, it would be known as commingling funds and is punishable by law. The violation has different penalties depending on the state where the transaction takes place.
Using the money for personal purposes
As with commingled funds, attorneys cannot use escrow account funds for personal matters or financial gain. As with the previous point, the account should only hold the client’s money until all the contract terms are fulfilled.
Breach of contract
Must use the escrow account in a manner that does not violate any of the terms of the contract. The consequences of not complying with an agreement related to funds are similar to breaching any contract clause. In this case, the aggrieved party may file a lawsuit to recover the money.
Fraud is another of the disadvantages that can arise when you have an escrow account. The buyer and seller must receive consistent and transparent information about the funds and documents to avoid this problem.
If the attorney defaults before the seller are entitled to the money, the buyer suffers the loss because it was still his money. But, if the agent breaches his responsibility after the seller is entitled to the funds, the seller incurs the loss because the money was already part of his property.
What are the responsibilities of the impartial agent?
To avoid any inconvenience concerning the funds and monies withheld, both parties need to be aware of the specific responsibilities of the impartial agent. Here are the actions you should not take:
- Refuse to pay the funds and surrender the title after completing all contract steps
- Deliver the funds and title before the agreed-upon deadlines have passed
- Lose the money or part of it, as well as the documents. No matter the circumstances, whether you used it for your benefit or not, you could be penalized for losing them
- Embezzlement of the funds or goods delivered
Any of the abovementioned items are enough to know that you do not have transparent management and can start a lawsuit process. In most cases, the lawyer is obliged to compensate the affected parties financially for the damages caused and reimburse the lost money.
The actions taken in these cases depend on local and state laws. In certain circumstances, the court may change the agent involved in the problem to one who can safeguard the remaining retained property.