If you decide To buy an apartment, but you doubt the safety of the transaction being made or that the developer will commission the house on time, the use of escrow account… What is an escrow account, how to use it and what advantages and disadvantages does it have?
What is an escrow account?
Escrow account is a special bank account, the funds on which are transferred from one owner to another only if the agreed conditions are met.
For this reason, such accounts are also called conditional… For those familiar with digital assets, an escrow account is a bank analogue of a smart contract.
If you need two parties to open a regular bank account – a client and a bank, then when you open an escrow account, one more participant is added:
- buyer – depositing money into the account;
- seller – receiving money from the account;
- bank – escrow agent.
In simple words, the bank acts as the guarantor of the transaction between the seller and the buyer. In short, the diagram looks like this:
- the buyer, the seller and the bank sign a tripartite agreement;
- the buyer opens an escrow account;
- the seller fulfills the conditions specified in the contract;
- the seller becomes the owner of the account with the funds available on it.
That is, the bank guarantees the buyer the fulfillment of all the conditions stipulated in the contract, and the seller – the receipt of the agreed amount.
Important properties of an escrow account
An escrow account has its own characteristic features that you need to know about:
- the buyer is the owner of the money, but he cannot dispose of it;
- each escrow account has a clearly defined expiration date specified in a tripartite agreement. If the seller does not fulfill the conditions stipulated in the contract before the deadline, the funds are returned to the buyer;
- the maximum period for which such an account can be opened in Russia is 5 years;
- Escrow accounts are used for the sale and purchase of real estate, art, cars, securities, etc.
- An escrow account can be opened by both an individual and a legal entity – a company or an organization.
Benefits of escrow accounts
- Ensures the safety of both the buyer and the seller when dealing with any assets.
- The cost of opening an escrow account is a fraction of a percent of the amount on the account, while the cost of the closest analogue, letter of credit or safety deposit box, will be a few percent.
- To escrow accounts the state deposit insurance program applies…
- You need to carry cash to a safe deposit box, which is not very convenient and very unsafe, and an escrow account can be replenished by wire transfer.
Disadvantages of escrow accounts
- If the bank’s license is revoked, which now happens almost every day, the state guarantees only a limited return. It depends not only on the amount on the account, but also on the time for which the escrow account is opened.
- Escrow accounts appeared in Russia relatively recently, and not all banks offer such a service to their clients.
Now, knowing about escrow accounts, you can move to a new level of security when buying or selling valuable assets.