Real estate

How Escrow Accounts can Help Mitigate Fraud in Real Estate

By 03/06/2021 0 Comments

Introduction

The buying and selling of real estate can be a very challenging process for individuals having no experience of 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 financials. The buyer also risks losing the property to another potential buyer in the process of verification of details. Therefore, a system is needed that can assure the seller that someone is genuinely interested in their property so that they temporarily remove its listing from the market. The same system must also ensure that the buyer gets what he pays for and no fraud can take place. Here is where the role of escrow accounts come into action. Continue reading to understand how escrow payments are becoming an answer to mitigation of real estate fraud.

Risks Involved in Buying and Selling of Real Estate

Pakistan’s real estate market is in its early stages of reform. The sector lacks in 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, and it takes deep scrutiny and a giant leap of faith for some individuals to carry on with 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 major 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 large 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 which defines a financial instrument designed to ensure compliance between two transacting parties. The process involves using services of a third party that holds funds until both parties have completed their contractual obligations. The buyer usually deposits a valuable in the form of 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 on 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 to 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 some of the key notable areas where escrow payments are used. The financial instrument has its advantages and disadvantages. It provides protection during 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 in some cases are considered as downsides to using the method. Two types of escrow accounts are involved in the home-buying process. A mortgage escrow account can be set up by the mortgage lender to ensure that certain property related payments can be paid on time. The applicant will have to pay a certain account 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 details of the advertised property 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 above-mentioned procedure mitigates multiple risks for the buyer, seller, and investor. If implemented properly, the system can help overseas investors gain more confidence while making a purchase in Pakistan. Therefore, escrow accounts are the future of real estate transactions.

Conclusion

Escrow accounts are a financial instrument that use 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 the process of 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.

Bibliography

Banton, C. (2021). Escrow. Retrieved from https://www.investopedia.com/terms/e/escrow.asp

Dawn. (2018). Real estate scams. Retrieved from https://www.dawn.com/news/1435724

Demshki, K. (2017). The Role of Escrow Accounts in Real Estate Transactions. Retrieved from https://www.pennymac.com/blog/the-role-of-escrow-real-estate-transactions

Khan, U. (2020). Pakistan’s 2021 Real Estate Prospects And Challenges. Retrieved from https://globeestatebuilders.com/pakistans-2021-real-estate-prospects-and-challenges/

Pritchard, J. (2021). What Is Escrow? Retrieved from https://www.thebalance.com/what-is-escrow-315826

Research Questions

1. How are escrow accounts used in real estate?

2. What are the benefits of using escrow accounts in the real estate sector?

Key Takeaways

1. A system is needed that can assure the seller that someone is genuinely interested in their property so that they temporarily remove its listing from the market.

2. Access to vital information such as land titles and registry is not readily available in Pakistan, and it takes deep scrutiny and a giant leap of faith for some individuals to carry on with 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.

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