What does the term "escrow" refer to in real estate transactions?

The term "escrow" in real estate refers to a financial arrangement where a neutral third party holds funds or documents on behalf of the parties involved in a transaction until specific conditions are met. This process is crucial in ensuring that both the buyer and seller fulfill their obligations before the property is officially transferred. For instance, the buyer might deposit funds into escrow, and the seller will provide the necessary documents. Once all conditions—such as inspections or financing—are satisfied, the third party releases the funds to the seller and the documents to the buyer, thus protecting both parties in the transaction.

This understanding of escrow is foundational in real estate dealings, as it secures the interests of both the buyer and the seller, mitigates risks, and helps move the transaction forward smoothly. Other options, like a type of loan, a schedule of payments, or an investment strategy, do not encapsulate the concept of escrow and instead refer to different aspects of real estate and financial processes.