An escrow account is a temporary pass through account held by a neutral third party (bank) during the process of a transaction between two parties. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. (Securities, funds and other assets can be held in escrow).
This account operates until the completion of a transaction process, An escrow account is an account set up with a neutral third party (such as an escrow agent, bank or some other financial institution) to hold funds in trust until particular conditions are met by the person for whom the money is designated.
Escrow account and how does it help?
- An escrow account is one in which funds are accumulated for specific disbursements. The disbursements could be regular payouts for construction activity, payment of taxes and interests.
- An escrow mechanism is required for timely and proper release of funds without any bureaucratic hurdles.
- For an escrow account, the bank and the account holder (in this case, the builder) draw up an agreement and a trustee is appointed for the account. The trustee has well-defined instructions on release of funds, enforcing a charge on assets, managing the covenants and with approval, effecting the remedies against default. The escrow trustee to that effect is a neutral party.
- What works here is the fact that the account holder (builder) cannot use the funds parked in this account for a purpose that is not mandated. So if the mandate is that the funds will be used for construction activity, the funds cannot be used for any other purpose.
- In case of apartment projects, lending banks usually act as trustees. And for this reason the builder has to take a no-objection certificate from the bank before registering the apartment or any part of the project in the name of the buyer.
- Draft Real Estate (development and regulatory) Bill, 2011 has taken notice of the problem. It proposes the use of escrow for customer advances and all third-party liabilities so that proper monitoring and use of proceeds is ensured in real estate projects.
Process Involved:
- In the escrow, all parties involved give their instructions to neutral intermediary(bank), called the “escrow agent” or “escrow manager” whose duty it is to assure that no funds, assets or property will change hands until all instructions have been carried to completion.
- An escrow is beneficial to both parties as an escrow agent will be holding the documents, processing all regular payments, maintaining an accounting of all transactions and providing the required reporting.
- Escrow is a way of transferring or exchanging property or money using a neutral third party (bank). Escrow provides the public with means of protection in the handling of funds, assets and/or documents. Escrow enables the buyer and the seller to transact business with each other through a neutral third party (bank), thereby minimizing their risk. Escrows are established to hold original documents, real estate deeds, titles to property, money or securities until conditions are fulfilled and the items are released.
Why do I Need an Escrow?
- Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until all of the instructions in the transaction have been followed. The escrow agent or manager has the obligation to safeguard the funds, assets and/or documents while they are in the possession of the escrow agent, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
What Types of Transactions go through Escrow?
- Most contracts that involve the transfer, lease or financing of real or personal property can be placed in escrow. You may be involved in escrow not only when you buy or sell real estate, but also when you make trade deal, sell a business or transfer stock in a closely held business. The buyer or seller should demand the protection of escrow for any transaction which involves a substantial investment.
What can you do?
- The use of escrow mechanism is a confidential agreement between the lender and the borrower, who could be your developer.
Escrow can be effective in:
- Contracts and deeds of trust between private parties.
- Safekeeping of documents.
- Holding and releasing of funds for subdivisions, construction.
- Projects and other business transactions.
- Processing of funds related to trade deals.
- Holdbacks and reserves on corporate purchase transactions.
- Holding earnest money and deposits on capital-raising transactions.
- Mergers, acquisitions and buyouts.
- Investment offerings.
- Settlement of claims.
Documents required
For Individual:
- Completely filled in Account Opening Forms
- 2 Government Issued ID's per client
For Corporate:
- Completely filled in Account Opening Forms
- 2 Govt. Issued ID's per signatory/party
- Articles of incorporation and by laws
- Board Resolution appointing MPI Trust as Trustee and signatories of the account (Notarized) or Corporate Secretary Certification (Notarized)
- Company Issued and Govt. Issued ID per signator
Advantages:
- Provides greater security and comfort
- Trapping of identified cash flows
- Ease of monitoring
- Less expensive rather more profitable in comparison to Bank Guarantee
Disadvantages:
- When you have an escrow account, you don't have access to or control of the money. Money that sits in your escrow account also doesn't earn interest like it would in a personal high-yield savings account. Borrowers who don't have an escrow account can invest their money as they see fit and possibly earn a higher return on it by putting it in a more fruitful account.
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