An escrow account is a 3rd party account that holds funds during a transaction. Typically the funds are held until all contractual obligations have been reached between the parties. Once approved, the escrow account releases funds that it has released from the buyer to the seller.
The use of escrow accounts is common in the world of investment and in particular real estate.
Typically in real estate, when purchasing a property with financing, the down payment is held in an escrow account. Afterward, the property goes through inspections and a title search. If the property is approved by the title search and inspection then the funds will be released from escrow to the seller.
If the property fails to get approval for any reason then funds will be returned to the buyer as part of an appraisal contingency. Both the appraisal contingency clause in a contract and the use of an escrow account protect buyers and mortgage providers.
Occasionally escrow is used for other deals, such as the purchase of stocks or luxury goods. Company acquisitions, for example, are typically done using an escrow account. Sometimes online transactions are done using a form of online escrow, such as PayPal or others. The purpose is to guarantee the authenticity and sometimes the value of the product in question.
There is generally a small fee associated with using an escrow account. Despite the fee, using an escrow account along with an appraisal contingency is highly recommended when buying a property.