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

In real estate transactions, "escrow" refers to a financial arrangement where a third party holds funds and documents on behalf of the buyer and seller until certain conditions of the transaction are fulfilled. This arrangement provides a level of security and assurance for both parties involved in the deal. For example, the buyer's deposit or the full purchase price is kept in escrow until all conditions specified in the purchase agreement—such as completion of inspections or the finalization of financing—are satisfied. Only then will the funds be disbursed to the seller, ensuring that each party upholds their end of the agreement.

This practice helps mitigate the risk of one party defaulting on the agreement and ensures a smoother transfer of ownership. By using escrow, both the buyer and seller can have peace of mind that their interests are protected during the transaction process.