The buying and selling of real estate can be challenging for individuals with no experience in the processes involved. Many steps are required in completing a real estate transaction. Say a buyer likes a property, but the initial listing data often does not provide the complete picture of the estate’s condition, maintenance, and finances. The buyer also risks losing the property to another potential buyer in the process of verification of details. Therefore, a system is needed to assure the seller that someone is genuinely interested in their property to remove its listing from the market temporarily. The same approach must also ensure that the buyer gets what he pays for and no fraud can occur. Here is where the role of escrow accounts comes into action. Continue reading to understand how escrow payments are becoming an answer to the mitigation of real estate fraud.
1. How are escrow accounts used in real estate?
2. What are the benefits of using escrow accounts in the real estate sector?
Risks Involved in Buying and Selling of Real Estate
Pakistan’s real estate market is in its early stages of reform. The sector lacks many best practices that make the sale and purchase of real estate safe, secure, and trustworthy. Access to vital information such as land titles and registry is not readily available. It takes deep scrutiny and a giant leap of faith for some individuals to carry on bigger deals (Khan). Many get exploited due to this reason and end up paying for land which ultimately belongs to someone else other than the seller. Another significant issue is the ongoing dearth of real estate development projects that market dubious profits on investments to entice the public (Dawn). People are generally not aware of how these investments yield profits over time. There is also no transparency on what valuation models are used to calculate such profits. Many end up losing significant amounts of money as most of these projects never get completed.
Buyers have a large variety of homes to choose from when making a purchase. But as houses are not constructed with quality control assessments, issues can arise later in many forms. Therefore, a potential buyer needs to examine many details before purchasing a house. Developers use tactics to increase the aesthetic look of homes, but many issues related to material and regulation spruce up later for buyers (Pritchard). Therefore, the buyer feels less secure while making upfront payments for the entire house. Challenges like these can be solved using the escrow payment model. Continue reading to understand what escrow payments are.
Escrow Accounts and Real Estate
An escrow is a legal concept that defines a financial instrument designed to ensure compliance between two transacting parties. The process involves using the services of a third party that holds funds until both parties have completed their contractual obligations. The buyer usually deposits valuables in express payments, documents, gold, securities, and funds (Demshki). The third party is then responsible for ensuring that the funds are only released to the seller if the items advertised are delivered according to their description. It can be observed that buyers can reject a product at their sole discretion. This makes it challenging for sellers as the risk of default on product acceptance is very high. Therefore, escrow accounts make the overall process of transactions more reliable and trustworthy.
Escrow can be associated with real estate transactions, but it can also be applied to any transaction where funds will be transferred from one party to another (Banton). Internet transactions, banking, intellectual properties, mergers, acquisitions, and law are notable vital areas where escrow payments are used. The financial instrument has its advantages and disadvantages. It protects a transaction and is beneficial for both the buyer and seller when high-value products are involved. But complications in calculating estimates for payments and high fees for the service are considered downsides to using the method. Two types of escrow accounts are involved in the home-buying process. The mortgage lender can set up a mortgage escrow account to ensure that specific property-related payments can be paid on time. The applicant will have to pay a separate charge alongside his monthly payments. A real estate escrow account usually holds funds or paperwork till the completion of a real estate sale or purchase.
The process for setting up escrow payments includes opening an escrow account with any third-party service provider. The lender or seller then must complete an appraisal whereby the advertised property details are checked and verified. Finances are secured from the buyer to ensure that the party remains committed to the contract. After approval of seller disclosures, a home inspection is carried out, and land title reports are checked. If everything goes well, the payment is disbursed to the seller with minimal effort, and the escrow account is closed. Realising the potential for fraud in the real estate sector due to lack of access to information, lack of regulation and lack of quality control, the procedure mentioned above mitigates multiple risks for the buyer, seller, and investor. If appropriately implemented, the system can help overseas investors gain more confidence while purchasing in Pakistan. Therefore, escrow accounts are the future of real estate transactions.
Escrow accounts are a financial instrument that uses third-party services to ensure that buyers and sellers of high-token commodities stay committed to their contractual obligations. As large amounts of money are involved in buying and selling real estate, ensuring safety, security, and transparency in the process remains a challenge. A system that holds payments until details are verified from the seller’s end, and buyers remain committed can transform the real estate landscape of Pakistan.
1. A system is needed to assure the seller that someone is genuinely interested in their property to remove its listing from the market temporarily.
2. Access to vital information such as land titles and registry is not readily available in Pakistan. It takes deep scrutiny and a giant leap of faith for some individuals to carry on bigger deals.
3. Buyers have a large variety of homes to choose from when making a purchase. But as houses are not constructed with quality control assessments, issues can arise later in many forms.
4. An escrow is a legal concept that defines a financial instrument designed to ensure compliance between two transacting parties.
5. Realising the potential for fraud in the real estate sector due to lack of access to information, lack of regulation, and lack of quality control, escrow accounts mitigate multiple risks for the buyer, seller, and investor.