Definition of escrow: A neutral third party who stands between two transacting parties to provide assurance that both will honour their obligations.
What does escrow mean?
Not all third parties involved in an important transaction are linked to the meaning of escrow.
Escrow relates more specifically to the process where a third party takes an asset into their custody and releases it to the other party only when the purchase consideration has been transferred between the buyer and seller.
This can also work the other way around, where the escrow receives the cash consideration, but holds it in trust until it independently confirms that the asset has been transferred to the buyer.
The trustee behind the escrow process doesn’t personally own the asset or cash – it wouldn’t appear on their balance sheet. The assets are said to be ‘held in trust’ on behalf of the parties.
An escrow service can give two parties the confidence to transact even if they don’t trust each other to abide by the rules of the agreement. An escrow process removes the need for a seller to trust that the buyer will pay for the asset once they have received ownership.
How is the word escrow used in a sentence?
Here’s a couple of sentences using the word escrow in a financial context:
“The deeds to the property were transferred into escrow on Thursday night after the sale was confirmed”
“The purchase price was received from the escrow account just this morning, it’s been nice doing business with you.”
How does the definition of escrow relate to investing?
Escrow is an obscure process that may or may not fall into your personal finance radar. If you read investing books quite widely, you will no doubt come across the word at some stage.
Not all properties are exchanged through an escrow process, although the use of lawyers in general to assist with the payment process does largely overlap.