All You Need To Know About Escrow Account
Escrow accounts is a term we all have heard in real estate. This is an account which acts as a holding tank of funds and is popular among Indian real estate developers, who park their money in these accounts and then use them for funding their ongoing projects.
Funds: A common problem
A delay in project, the developer would largely say that there is a shortage of funds to further construct. In such a situation, the developers are seen using funds that they have received for another project of theirs and use that money for making the payment of taxes and interest of another project. This is where an escrow account comes to rescue.
What is an escrow account?
Primarily meant for saving funds for a specific purpose, an escrow account comes with some restrictions, especially imposed on to the amount that can be withdrawn. This restriction ensures that the account holder can save the money. Such accounts are temporary The nature of the account is temporary and the account is opened until the completion of the entire transaction process.
Who manages the account?
An escrow account is managed by the bank or attorney of the account holder. There is an escrow agent that manages the account at a certain per cent of commission.
How escrow account solves this issue?
To open an escrow account, the holder and the bank enter an agreement and a trustee is appointed who is guided by the well-defined instructions on the release of funds. The key benefit of having an escrow account is that the developer can release funds meant only for the said purpose. Thus, if it is said that the funds deposited in the escrow account will be used for construction activity then it has to be used for the same purpose.
Do developers in India have escrow accounts?
Though having an escrow account for a developer is not mandatory, but, many real estate companies do rely on these accounts, especially those who receive money private equity or foreign institutional investors.
How does it help the home buyers?
Homebuyers largely face the brunt of delayed projects. And, an escrow account helps in overcoming this as the money parked in these accounts ensure timely completion of the project and proper use of fund utilisation.
Also Read: Term of the Day: Escrow