The real estate sector in India is expanding. The real estate market demands secure and transparent property deals, and escrow transactions arrived as an all-in-one solution for that. They offer a solution that safeguards the interests of all parties involved, bringing up confidence and minimising the risks associated with large financial transactions.
Are you wondering what escrow transactions mean? Is that practical in India? No worries. Today’s blog on Brick & Bolt will explore the benefits, processes, and challenges of escrow transactions in Indian realty. You will gain its advantages.
What is an Escrow Transaction?
An escrow account is an account where money is kept while two or more parties complete a transaction. A trusted third party(Escrow company) holds the money until the construction company fulfils their part of the deal. If the construction company does what they agreed to, they get the money. If not, the money goes back to the customer.
Benefits of Escrow Transactions
Incorporating Escrow accounts in India provides numerous benefits, giving a secure and neutral ground for different transactions:
1. Security and Protection
Escrow accounts work as a neutral third party, mitigating risks associated with transactions by securely holding funds until all contractual conditions are met.
2. Trust and Transparency
Trust is the base of any successful transaction. Escrow accounts offer a secure platform, providing confidence among parties and ensuring that each fulfils its obligations.
3. Timely and Proper Transfer
Once all conditions are met, escrow agents facilitate the timely and proper transfer of funds and documents, minimising delays and ensuring a smooth transaction.
4. Efficient M&A(Mergers and Acquisitions) Transactions
Businesses engaging in mergers and acquisitions can rely on escrow accounts. They efficiently manage payments and shield from potential post-closure liabilities, providing a secure environment for such transactions.
5. Reduced Risks
Escrow transactions help to lessen risks associated with real estate deals, such as title defects, liens, or other limitations, by allowing for thorough due diligence and verification before the final transfer of assets. This includes verifying documents like patta and chitta to ensure clear property titles.
6. Project Fund Management
In construction projects in India, escrow accounts help manage money efficiently by releasing payments to contractors only when they finish specific parts of the project. You can explore various construction financing options that leverage escrow mechanisms for secure fund management.
Escrow Process in Indian Realty
The escrow process in Indian real estate generally follows these sequence of steps:
1. Opening the Escrow Account: The customer and contractor initiate the escrow process by selecting a reputable and licensed escrow company. They provide the necessary documents and instructions for the transaction.
2. Agreeing to Terms: The customer and contractor agree on the terms and conditions, such as the amount, schedule, criteria, and fees. They sign an escrow agreement to specify the roles and responsibilities of each party and the escrow agent.
3. Depositing Funds and Documents: Depending on the project scope and duration, the customer deposits the required funds, such as earnest money or a down payment, into the escrow account. The contractor/construction company provides the necessary construction documents, deeds, and other paperwork.
4. Customer Pays to Escrow Company: The customer submits payment using an approved payment method to the secure escrow account. The escrow company verifies the payment and notifies the construction company that the funds have been secured.
5. Contractor Initiates Construction: Upon payment verification, the contractor is authorized to commence the construction project and provide progress updates.
6. Project Completion: The contractor or construction company informs the escrow company once the construction project is completed according to the agreed-upon terms.
7. Customer Accepts Completion: The customer has a set number of days to inspect the completed project and decide to accept or reject it. If the customer accepts the completion, the process moves to the final step.
8. Escrow Company Releases Funds: The escrow company releases the funds from the escrow account to the contractor, completing the transaction.
Limitations of Escrow Transactions
- Escrow services typically come with associated fees, which can vary depending on the escrow company and the complexity of the transaction. Escrow fees can affect profits. These fees may be higher for online sales than those charged by intermediaries like PayPal.
- Escrow transactions involve multiple parties and steps, sometimes leading to delays or extensions in the timeline.
- Utilising escrow for taxes and insurance could lead to increased mortgage payments.
- There is a possibility of either overpaying or underpaying into the escrow account.
Consideration Before Signing Real Estate Escrow Agreement
Using escrow helps you buy property safely. But keep these things in mind:
Keep an Eye on Your Credit
The way you handle escrow payments affects your credit score. So, stick to the payment rules in the escrow agreement to keep your credit in good shape.
Inspection of the Property
Before finalising everything, get the escrow agent to look over the property. Have a pro check things like water and electricity to make sure everything’s good.
Be Careful When Signing
Before you sign an escrow agreement for real estate, read all the papers carefully and make sure they match what you’ve agreed to. This will ensure that everything goes smoothly when it’s time to hand over the property. If you are an NRI interested in buying property in India, escrow transactions can be particularly beneficial in facilitating a secure and transparent purchase process.
Conclusion
Escrow transactions are a good way to make real estate deals safer in India. A neutral third party holds the money until both the customer and construction company have followed the agreed-upon terms and conditions. Using escrow has many pros and cons. The escrow process involves several steps, such as opening an account, putting in money/documents, agreeing to terms, and many more explained above. This builds trust and lowers risks in big-money deals. Before signing an escrow agreement, check your credit, inspect the property thoroughly, and carefully read all paperwork to ensure everything matches what was agreed upon.
As a leading construction company in Pune, Brick&Bolt utilizes an escrow mechanism to ensure secure and transparent money transactions. This safeguards our customer’s and contractor’s money and gives them peace of mind.
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