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Today, no one is surprised by new types of financial activities. In the age of the Internet and artificial intelligence, it seems that modern society has achieved global progress in everything, however, as history shows, many financial transactions appeared long before modern brainstorming. So, in ancient times, the idea of an escrow account was born, the essence of which, when conducting transactions, is to guarantee the security of funds and property of both parties thanks to a third party. Such an account was most developed in the middle of the nineteenth century, when there was a “prepayment” transaction: at the conclusion of the contract, one of the parties contributed part of the amount, and the other had to provide goods or perform a service. Many entrepreneurs eventually faced such problems that the terms of the contract were not fulfilled, and the prepayment was not refunded. It was then that an escrow account was introduced to protect the rights of both parties.
Initially, escrow was used in real estate transactions: the buyer deposited money into an escrow account, and the seller transferred ownership documents. The money in his account was kept by an intermediary company, which was a certain guarantor between the seller and the buyer. Later, having proven themselves from a certain side, escrow accounts began to be used in other areas of financial transactions: franchising, startup financing, online trading, etc. For sure, many people have watched the movie “The Wolf of Wall Street”, but few people know that escrow has always been in great demand on this street. Large purchase and sale transactions were constantly being carried out on Wall Street, and escrow, in turn, helped reduce the risks of such transactions.
How does it work? In fact, the escrow account mechanism consists in a three-way agreement between the depositor (a special conditional account of the buyer), the escrow agent (the bank in which funds are recorded and blocked) and the beneficiary (the account of the contractor, who, if all the terms of the agreement are fulfilled, will receive funds). For example, a buyer plans to purchase an apartment in a building at the construction stage. He does not know what can happen to the construction company during this period: construction did not start, closed, the company went bankrupt and all that sort of thing. In this case, the escrow system allows you to protect the interests of both the buyer and the seller. Until the moment the object is put into operation, the buyer will know that the seller will receive the money if he fulfills his obligations under the contract; and the seller can safely do his job, since he already has payment on the conditional account. An important point is that the agent bank does not have the right to use the money in the escrow account for lending to other persons, as is usually done with funds on deposits.
At the same time, escrow works differently in many countries. For example, in the USA (where this scheme originated), not only funds can be transferred to an escrow account, but also securities, real estate, and the results of scientific research can be transferred. In Austria, an escrow account is used only for step-by-step payment of real estate. In Dubai, when conducting home purchase transactions, such an account is necessarily controlled by the Land Department (DLD). This gives even more guarantees for a successful transaction. And since our company keeps up with the times, the developers with whom VelesClub Int cooperates. in Dubai, they also work with an escrow account.
Another type of escrow is online shopping. After the covid pandemic, many shoppers began to shop online. However, not all sellers acted in good faith. In view of this, some countries have introduced online escrow, which is used abroad when buying goods or services via the Internet: an escrow agent holds the buyer's money until the seller fulfills its obligations. This scheme was worked out very clearly on the popular AliExpress platform, when funds were transferred not to the seller, but to the escrow accounts of the platform. As soon as the buyer receives the goods, the money is transferred to the seller.
In Russia, the escrow account appeared relatively recently and it is currently used only in housing construction. In 2019, changes in legislation came into force, according to which, in most cases, the developer is obliged to use escrow accounts for crediting and storing money from shareholders. This was applicable only in multi-apartment shared-equity construction. However, already in July 2024, a new decree was signed concerning the escrow account in individual housing construction (IHS), that is, starting from March 1, 2025, escrow accounts in Russia can also be used in the construction of private houses. How is this remarkable?
Firstly, the funds deposited into the escrow account are protected from any write-offs and illegal frauds. After all, often during the construction of a private house, developers quit work halfway, the teams change, and the customer cannot influence this in any way. In the case of escrow, a private investor has the right to withdraw his finances from this account if the developer cannot complete the house or significantly delays its commissioning. In this scenario, the customer is protected and motivates the developer to deliver the object on time.
Secondly, the low-rise construction market is becoming more transparent and understandable. Private owners will be interested in ordering the construction of their house from professional builders, and they can also get approval for a mortgage of a suburban facility.
Thirdly, the developer is also insured — upon completion of his work, he is guaranteed to receive payments under the contract.
At the same time, the customer and the contractor must agree on a voluntary basis to open an escrow account in the Housing and communal services. Will the developers go for it? Time will show. Nevertheless, the escrow account has both its advantages and disadvantages.
To sum up, it is safe to say that despite the disadvantages, the escrow account becomes the sales scheme that minimizes the risk of losing money when making a transaction. And how do you feel about buying real estate through an escrow account?
