What Can an Escrow Agent Do for You?
Escrow agents are neutral parties who have one primary purpose — to support the negotiation, administration and closing of a transaction in a way that protects the legal rights of all parties. If you're working on closing a big business transaction, like a merger or a real estate investment, opening an escrow account is probably the last thing on your mind. But a skilled escrow agent can be critical in helping to make sure everything comes together successfully.
When Is an Escrow Account Needed?
- Real estate transactions commonly use escrow for down payments or even to cover environmental cleanup costs.
- Mergers and acquisitions often have a cash holdback requirement as part of the underlying purchase agreement.
- Court case settlements can be held in escrow.
- Proceeds from sale of like-kind property can be held in escrow, when a seller replaces one investment property with another (a so-called “Section 1031 like-kind" exchange).
What Should I Look for in an Escrow Agent?
Two things: accuracy and speed.
Agents must be able to complete the necessary tasks very quickly, as some escrow transactions may need to be established in as little as a single day. These tasks include:
Determining and setting up the appropriate escrow structure
Negotiating the escrow agreement
Collecting the necessary compliance documents
Accepting deposits and investing them in accordance with the agreement
Reporting taxes and disbursing funds
Primary considerations for choosing an escrow agent include asset safety, the level of expertise in handling a range of escrows (including complex transactions), servicing capability and pricing.
How is an Escrow Account Serviced?
Your escrow agent will assemble a team of professionals with knowledge in a variety of important fields, such as:
These professionals will oversee the details and make sure that all aspects of the transaction are handled in a timely fashion. Having an experienced team at your disposal can be useful, particularly in complex, cross-border transactions, which require a higher level of security.
Compliance, in particular, can be the biggest challenge, since the Patriot Act and other laws now require full disclosure of corporate and personal information. The lack of this documentation can impede the process, which could delay the process or lead to the entire transaction falling apart.
Where is Escrow Money Kept and for How Long?
The average escrow account has a life of between three months and two years.
The money is often placed in FDIC-insured accounts or investment vehicles such as short-term Treasuries or money market mutual funds. When deciding where the money is held, you should also take into account the credit rating of the financial institution where you'll be depositing it.
How Big is a Typical Escrow Account?
It varies. Firms that specialize in sophisticated escrow servicing usually target accounts of $1,000,000 or more, and the biggest escrows can range into the hundreds of millions of dollars.
Why Should I Pay Attention to This?
The answer is simple. Having an experienced escrow agent engaged early on in the process can help you achieve the best possible outcome for everyone involved.