What does the term "escrow" refer to in real estate transactions?

The term "escrow" in real estate transactions refers specifically to a neutral third party holding funds or documents on behalf of the parties involved. This mechanism is designed to ensure that the terms of a contract are met before the transaction is finalized. In an escrow arrangement, the parties agree to deposit certain assets—such as earnest money or closing documents—with the escrow agent, who retains control over these items until the conditions of the transaction are fulfilled.

By using an escrow service, buyers and sellers can feel secure knowing that their respective interests are being protected. For instance, the buyer can trust that their funds will be released to the seller only when all contractual obligations are satisfied, while the seller has assurance that the buyer has the necessary funds to complete the purchase. This process helps to facilitate trust and mitigate the risks associated with real estate transactions, making it an essential aspect of buying and selling property.