John decided to buy an apartment. He chose the suitable option himself, the legal purity of the real estate was checked by a familiar specialist. But now John is worried - how to safely conduct the transaction itself? What if the seller gets the money, but doesn't rewrite the apartment for John? One of the options to protect yourself is an escrow account.
An escrow account is a special account for the secure settlement of payments between a buyer and a seller. It is also called a conditional account, because it is automatically transferred from one owner to another when certain conditions occur.
The buyer deposits the money in an escrow account, and the seller can pick it up when he fulfills the conditions previously prescribed in the contract. The Bank, as an independent intermediary, monitors the fulfillment of these conditions.
With the help of an escrow agreement, you can transfer not only money, but also securities and any movable property. In this case, an intermediary can be not only a bank, but also, for example, a notary. Companies also use escrow agreements - for example, when paying for goods and services of partners.
Escrow is an alternative to a safe deposit box and letter of credit. It can be used when you need to buy or sell something expensive: real estate, a car, or any other value.
How to use an escrow account?
1. The buyer and the seller come to the bank together and sign a tripartite agreement. The contract says under what conditions the seller will be able to receive the money. The term of the contract must be indicated.
For example, John, together with the seller of the apartment, can come to the bank and open an escrow account for a month. The condition for receiving money is the re-registration of the apartment with John. Proof - an extract from the Unified State Register of Real Estate (USRN) or a sale and purchase agreement registered.
2. The buyer deposits to the escrow account the amount specified in the agreement.
3. The seller fulfills the terms of the agreement and brings the necessary documents to the bank.
4. The bank gives the seller access to the account and either issues money or transfers it to another account at the seller's request.
If the transaction does not go through within the agreed period and the seller does not bring the necessary documents, the bank closes the account and returns the money to the buyer. If the paperwork is delayed, the term of the contract can be extended, but usually the bank takes an additional commission for this.
Both individuals and legal entities can be buyers and sellers. For example, you can buy an apartment from a construction company through an escrow account.
Who owns the money in the escrow account?
By law, up to the moment of settlement, the money in the escrow account belongs to the person who deposited it. And then - to the one in whose favor the account was opened. The moment of settlement occurs when the seller fulfills the conditions specified in the contract.
Escrow, safe deposit box or letter of credit - which is better?
In many ways, these options are similar:
Payment security
In any case, the bank makes sure that the transaction is fair. The seller will definitely receive his money if he fulfills the conditions, and the buyer - the rights to the property.
Safety of money
Keeping money in a safe deposit box or bank account is usually safer than at home. It is unlikely that your apartment has the same multi-stage protection and security system as in a bank.
But an escrow account has its pros and cons.
Pros
Minuses
Which bank is the best to choose for a transaction through an escrow account?
The easiest way is to use the special list on the Bank website. This is a list of banks that can open escrow accounts to finance equity construction.
Developers can use escrow accounts for equity construction transactions as they see fit. But already, all such transactions will be carried out only with the help of escrow, there will be no other options.
The regulator's list includes only reliable banks. For example, banks with a credit rating not lower than the “BBB” level of the ACRA credit rating agency or not lower than the “BBB” level of the Expert RA credit rating agency. A complete list of requirements for banks that have the right to open escrow accounts for settlements under shared construction contracts is spelled out in a Government decree.
True, not all authorized banks have already started working with developers according to the scheme with escrow accounts. And even if they use this method to finance shared construction, they are not always ready to open escrow accounts for other transactions, for example, for the purchase and sale of apartments on the secondary market.
To conduct transactions through escrow, you do not have to limit yourself to banks from the regulator's list. Other banks can also work with escrow. If you are not going to invest in a construction site, but want to buy ready-made housing, a car or other expensive item, any banks that open escrow accounts for private clients are suitable for you.
But in this case, it is better that the amount of the real estate transaction does not exceed $ 150000, and for transactions with any other property - $ 20000 (then, if the bank's license is revoked, the Deposit Insurance Agency will quickly return the money to you). If the amount is larger, you can use several escrow accounts in different banks.
What are the features of an escrow account when buying a home under construction?
What are the advantages of buying through escrow accounts for shared construction?
The main advantage of escrow agreements when purchasing projects under construction is the protection of equity holders.
Delivery on time
The construction company cannot get the buyers' money until the house is completed. And all this time she has been using a bank loan. So it is in the interests of the developer to finish the construction on time, so as not to overpay the interest on the loan and to get money from the equity holders faster.
Cost control
The authorized bank that lends to the construction company closely monitors how the money is used. For example, if a developer takes out a loan for the construction of a specific residential complex, he cannot spend this money on anything else. It used to happen that construction companies completed the construction of old objects at the expense of new equity holders' money. And the new equity holders have been waiting for years for money to be found for their houses. This is now out of the question.
Safety of money
In the saddest case - if the developer goes bankrupt and does not finish building the house - people will not receive an apartment, but they will immediately have access to an escrow account and return all their money.
You can read about other ways to conduct a real estate purchase transaction in articles about safe boxes and letters of credit.
An escrow account is a special account for the secure settlement of payments between a buyer and a seller. It is also called a conditional account, because it is automatically transferred from one owner to another when certain conditions occur.
The buyer deposits the money in an escrow account, and the seller can pick it up when he fulfills the conditions previously prescribed in the contract. The Bank, as an independent intermediary, monitors the fulfillment of these conditions.
With the help of an escrow agreement, you can transfer not only money, but also securities and any movable property. In this case, an intermediary can be not only a bank, but also, for example, a notary. Companies also use escrow agreements - for example, when paying for goods and services of partners.
Escrow is an alternative to a safe deposit box and letter of credit. It can be used when you need to buy or sell something expensive: real estate, a car, or any other value.
How to use an escrow account?
1. The buyer and the seller come to the bank together and sign a tripartite agreement. The contract says under what conditions the seller will be able to receive the money. The term of the contract must be indicated.
For example, John, together with the seller of the apartment, can come to the bank and open an escrow account for a month. The condition for receiving money is the re-registration of the apartment with John. Proof - an extract from the Unified State Register of Real Estate (USRN) or a sale and purchase agreement registered.
2. The buyer deposits to the escrow account the amount specified in the agreement.
3. The seller fulfills the terms of the agreement and brings the necessary documents to the bank.
4. The bank gives the seller access to the account and either issues money or transfers it to another account at the seller's request.
If the transaction does not go through within the agreed period and the seller does not bring the necessary documents, the bank closes the account and returns the money to the buyer. If the paperwork is delayed, the term of the contract can be extended, but usually the bank takes an additional commission for this.
Both individuals and legal entities can be buyers and sellers. For example, you can buy an apartment from a construction company through an escrow account.
Who owns the money in the escrow account?
By law, up to the moment of settlement, the money in the escrow account belongs to the person who deposited it. And then - to the one in whose favor the account was opened. The moment of settlement occurs when the seller fulfills the conditions specified in the contract.
Escrow, safe deposit box or letter of credit - which is better?
In many ways, these options are similar:
Payment security
In any case, the bank makes sure that the transaction is fair. The seller will definitely receive his money if he fulfills the conditions, and the buyer - the rights to the property.
Safety of money
Keeping money in a safe deposit box or bank account is usually safer than at home. It is unlikely that your apartment has the same multi-stage protection and security system as in a bank.
But an escrow account has its pros and cons.
Pros
- There is no need to withdraw cash, carry suitcases of money, check their authenticity and count before putting it into a safe deposit box.
- Opening an escrow account can be cheaper than renting a safe deposit box or issuing a letter of credit. For servicing an escrow account, banks often charge a fraction of a percent of the amount on the account. And if in the same bank you take out a mortgage to buy an apartment, an escrow account can be opened for free.
- The money in escrow accounts goes to the deposit insurance system. Moreover, for escrow accounts, which are used for real estate transactions, the maximum amount of compensation is $ 150000. On other accounts, including letters of credit - only $ 20000. And the money in the cells is not insured by the state at all.
Minuses
- The maximum amount of state insurance payments on escrow accounts is $ 150000. This maximum is only valid if you have used an escrow account to buy real estate. Moreover, insurance for the maximum amount is valid for a limited period: starting from the date when the documents for registering the transaction were received and until the expiration of 3 working days from the date of registration of rights (or refusal to register) in the Unified State Register of Rights to Real Estate.
If the bank's problems arise later than this period, and the money has not yet been taken from the account, the limit of insurance payments will be standard - $ 20000. Also, the standard refund on escrow accounts is provided for transactions that are not related to the purchase and sale of real estate.
If you are planning a deal for a large amount, you need to choose a bank very carefully or conduct it through several escrow accounts.
By contrast, the money in a safe deposit box is considered only your property. Even if the license is revoked from the bank, the cell can only be opened with you and the values will be returned in full, no matter how much there is. Moreover, you can get access to the cell and get your money back within a few days. - Only a few banks can now open an escrow account, because this tool is relatively new. The Civil Code regulated all the details. There are many more banks that are ready to hand over a safe deposit box or draw up a letter of credit.
Which bank is the best to choose for a transaction through an escrow account?
The easiest way is to use the special list on the Bank website. This is a list of banks that can open escrow accounts to finance equity construction.
Developers can use escrow accounts for equity construction transactions as they see fit. But already, all such transactions will be carried out only with the help of escrow, there will be no other options.
The regulator's list includes only reliable banks. For example, banks with a credit rating not lower than the “BBB” level of the ACRA credit rating agency or not lower than the “BBB” level of the Expert RA credit rating agency. A complete list of requirements for banks that have the right to open escrow accounts for settlements under shared construction contracts is spelled out in a Government decree.
True, not all authorized banks have already started working with developers according to the scheme with escrow accounts. And even if they use this method to finance shared construction, they are not always ready to open escrow accounts for other transactions, for example, for the purchase and sale of apartments on the secondary market.
To conduct transactions through escrow, you do not have to limit yourself to banks from the regulator's list. Other banks can also work with escrow. If you are not going to invest in a construction site, but want to buy ready-made housing, a car or other expensive item, any banks that open escrow accounts for private clients are suitable for you.
But in this case, it is better that the amount of the real estate transaction does not exceed $ 150000, and for transactions with any other property - $ 20000 (then, if the bank's license is revoked, the Deposit Insurance Agency will quickly return the money to you). If the amount is larger, you can use several escrow accounts in different banks.
What are the features of an escrow account when buying a home under construction?
- The bank through which the transaction will go is chosen by the developer, not the buyer. But this can only be a bank from the list on the regulator's website.
- The developer receives the rights to the money of all equity holders when he rents out the house. Even if there are complaints, for example, regarding the quality of finishing of your particular apartment, and you do not want to accept it yet, the money still goes to the developer.
What are the advantages of buying through escrow accounts for shared construction?
The main advantage of escrow agreements when purchasing projects under construction is the protection of equity holders.
Delivery on time
The construction company cannot get the buyers' money until the house is completed. And all this time she has been using a bank loan. So it is in the interests of the developer to finish the construction on time, so as not to overpay the interest on the loan and to get money from the equity holders faster.
Cost control
The authorized bank that lends to the construction company closely monitors how the money is used. For example, if a developer takes out a loan for the construction of a specific residential complex, he cannot spend this money on anything else. It used to happen that construction companies completed the construction of old objects at the expense of new equity holders' money. And the new equity holders have been waiting for years for money to be found for their houses. This is now out of the question.
Safety of money
In the saddest case - if the developer goes bankrupt and does not finish building the house - people will not receive an apartment, but they will immediately have access to an escrow account and return all their money.
You can read about other ways to conduct a real estate purchase transaction in articles about safe boxes and letters of credit.
