What defines escrow in real estate transactions?

Escrow in real estate transactions is primarily characterized by a financial arrangement where a neutral third party holds onto funds or documents until specific conditions outlined in a contract are met. This arrangement helps ensure that both buyers and sellers are protected during the transaction. For example, when a buyer makes an earnest money deposit, that money is placed in escrow, and it will only be released to the seller once the sale is finalized, thus serving as an assurance that the buyer is serious about the transaction.

This system is critical as it facilitates trust between parties, ensuring that both the buyer and seller meet their obligations before any funds or property changes hands. Once all conditions are satisfied, the escrow agent will execute the transaction by distributing the funds to the seller and delivering the title or documents to the buyer, which finalizes the sale.