News, Culture & Society

Escrow Services and Real Estate Sector

As real estate transactions are transforming globally, new mediums for legal transactions are adopted to increase the sector’s legitimacy and credibility. In the countries where the real estate sector operates in the grey zone of the economy, malpractices become a common phenomenon that puts a cap over the real estate sector to reach its optimum level.

Against this background, in the countries where the real estate sector is performing productively and introducing new services in the real estate sector, the sector’s contribution to the country’s economic growth is far more than the developing countries.

Graana.com, against this backdrop, brings forward the concept of ‘Real Estate Escrow’, which gives a whole new meaning to the transaction process in real estate. By incorporating a proper mechanism in place, Pakistan’s real estate sector can also take the lead in establishing a framework for ‘Real Estate Escrow’.

What is a Real Estate Escrow

The phenomenon of escrow in real estate pertains to a third party that holds funds and other documentation until a deal is locked between the two parties. The third party acts as a conduit of trust-building, becoming a common medium of buying and selling worldwide.

One of the advantages of escrow in real estate is that it keeps both parties bound by the contracts in real estate. In the United States of America, almost 40mn of the residents manage their mortgages through an escrow account.

This also brings a fact to the light that Escrow accounts are not only restricted to the sales agreements; rather, the services also extend to mortgaging and housing finance. Those escrow accounts should be trusted which are independent and have no strings attached to any of the parties.

The benefits of Real Estate Escrow are elaborated as follows

Building Trust

From the nature of Escrow Accounts, it can be established that escrow accounts are one of the best-suited instruments for building trust and ensuring transparent transactions in real estate. One thing that is pertinent to mention here is that escrow accounts can only function properly when there is a complete legal framework backing the establishment of Escrows.

In the form of an organization, individual, or bank, the third party is entrusted with the authority by both buyer and seller to carry on the purchase of the property. Thus, escrow accounts can be the best tool for increasing efficiency in the real estate sector and the best medium for eliminating the multiple risks for buyers and sellers.

Reducing Transaction Cost

While doing a cost and benefit analysis before availing of service, the transaction cost influences people’s thinking while making a rational decision. Transaction cost refers to the cost incurred while availing a service; this even includes the factors like traveling cost, the time duration, and other frictions, including bureaucratic hurdles.

In this background, Real Estate Escrow can help reduce the transaction cost,  thus restoring investors’ confidence. If a transaction cost is higher, an investor is least interested in taking benefit of service and vice versa. In this background, Real Estate Escrow can help reduce the transaction cost, thus restoring investors’ confidence.

Increasing Tax Net

Escrow accounts can also help to increase the tax net as they can be a suitable medium for channelizing the tax collections. In many states, various entities provide services for paying off their property taxes via third parties.

The benefit of this mode of tax payment is that a person does not have to go through complex tax filing procedures, which can eventually be handled by the entity offering escrow services.

This factor can also help reduce the transaction cost, which greatly impacts an individual’s decision-making.  In some of the cases, it has been observed that the banks often create separate accounts for the payment of taxes and mortgage fees.

Accountability:

Availing the services of an escrow service provider ensures that the parties abide by the contract of the agreement. This process increases the accountability of the whole process so that a party does not breach an agreement.

At this juncture of time, the real estate sector lacks accountability in terms of the sale and purchase of assets; therefore, escrow accounts can be the best medium of introducing accountability and changing the real estate landscape of Pakistan.