What is an escrow account in simple terms?

What is Escrow Accounts: Understanding in Simple Terms

Navigating financial transactions can be overwhelming, especially when encountering terms like “escrow account.” In simple terms, an escrow account acts as a secure intermediary in various transactions, providing peace of mind for both parties involved. Let’s break down the concept of an escrow account in a way that’s easy to understand.

What is an Escrow Account in a bank?

An escrow account is like a trustworthy middleman in financial transactions. It holds funds or assets on behalf of two parties involved in a transaction until specific conditions are met. This ensures a secure and fair exchange, commonly seen in real estate, online purchases, or legal agreements.

“Do I need an escrow account or not?”, “Can I sell a car through an escrow account?”, “Is it true that escrow payments are for developers?”. If you are asking these or other questions about escrow accounts that appeared in Russia several years ago, then our article will help you figure it out.

1. History of appearance

2. What is an escrow account for home buying?

3. How it works: the stages of buying real estate through an escrow account

4. What the bank is doing: main task and responsibility

5. Mortgage and escrow: how does it fit?

6. What to choose: escrow, safe deposit box or letter of credit?

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Definition of an escrow account in simple words:

This is a bank account for “freezing money”, which is needed for the financial security of both parties to the transaction. Funds from this account will be transferred to the seller only when he fulfills his obligations to the buyer. For example, it will build an apartment building, rent out housing and carry out communications.

History of appearance

Escrow accounts appeared in Russia in 1996 due to changes in the Civil Code. But until 2004, they were not popular. But after the introduction of amendments to the Federal Law, they were remembered and talked about.

At first, their main task was to protect equity holders from unscrupulous developers. But already now, these accounts are used not only in real estate transactions, but also when buying or selling any goods, works, services, and even rights to the results of intellectual activity. In addition, an escrow account will come in handy when buying shares and participation interests.

Europeans and Americans have been using such accounts for a very long time – they are incredibly popular among the population. For example, a buyer who does not trust an online store, but orders goods there because of favorable conditions, opens an escrow account in order to protect himself from fraud. He transfers money there, informs the seller about it and expects the goods. As soon as he receives it, the escrow agent transfers the funds to the seller.

What is an escrow account for home buying?

In Russia, since the nineties and two thousandths, there have been too many defrauded equity holders: people who invested in the construction of an apartment building, but did not receive their square meters due to the problems of the developer. This problem had to be solved at the highest level, so it was necessary to adopt a new law in the field of residential construction – FZ-214 “On participation in the shared construction of apartment buildings and other real estate and on amendments to some legislative acts of the Russian Federation.”

The most important achievement of the law is the use of escrow accounts when buying real estate. They are required from July 1, 2019. The buyer’s money is frozen on these accounts until the developer puts the object into operation. That is, the construction company is now erecting the building using funds from its own wallet or loans.

How it works: the stages of buying real estate through an escrow account

1. Drawing up an agreement between the parties to the transaction.

That is, the buyer of real estate, the seller (beneficiary) and the trustee (bank) sign the documents, which spell out all the details of the purchase.

2. Escrow account registration

3. Refill

The buyer transfers the necessary amount to the escrow account to start the purchase process.

What the bank is doing: main task and responsibility

The main task is to ensure that the amount of funds on the account does not decrease. In simple words, the bank must block the money until settlements are made on the trade and financial transaction that is the subject of the agreement.

The bank usually does not charge individuals with a commission for opening escrow accounts.

Mortgage and escrow: how does it fit?

Everything is well thought out : the buyer can take out a mortgage at any bank convenient to him, and after approval, conclude an equity participation agreement with the developer. It will need to prescribe that the settlement between the buyer and the seller will take place using an escrow account.

From the original documents, only an identity card and the original of the DDU (equity participation agreement) are required.

The bank performs its functions of keeping money and monitoring the fulfillment of the terms of the transaction, and the buyer begins to pay the mortgage.

What to choose: escrow, safe deposit box or letter of credit?

Option	pros	Minuses
Escrow	It’s safe.You do not need cash, which means checking the authenticity of bills.Escrow meaning an account which is free or not very expensive compared to other options.Money on escrow accounts goes to the deposit insurance system, which means that the state will return up to ten million rubles in case of an unfavorable outcome.	The amount of insurance payments may decrease from 10 to 1.4 million, if the developer does not take the money immediately after the completion of construction. That is, the money will lie on the account, and the bank will go bankrupt – only 1.4 million rubles will be returned to the buyer.Not all banks offer the option to open an escrow account.The bank sends the money to the developer after the house is handed over. This is bad for the buyer, because when checking the property, flaws may arise, and the money will already be on the seller’s account.
Bank cell	Some consider this method to be reliable and proven: they have been buying apartments this way for many years. But the disadvantages in this case outweigh.Everything that is in a cell is considered the property of a person, not a bank, therefore, even if the license is revoked, the cell can only be opened with its owner.	The bank is not responsible for the authenticity of funds.The bank does not take responsibility for the amount in the box: it is not informed about its size, since it is not indicated in the documents.The cost of a cell depends on its size and can be up to 100 rubles per day. Expensive!The money in the cell is not insured by the state
Letter of credit account	Safe and secure if it is an irrevocable letter of credit.The money is insured by the state up to 1.4 million rubles.	Fraudulent schemes are possible. For example, a seller may forge home readiness documents and submit them to a bank to receive funds.The Bank is not a full-fledged participant in the transaction and does not have the right to check all stages and terms of the transaction. It is not as secure as with escrow.

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