What Is Escrow in Real Estate?

Every escrow question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. A Florida sales associate deposits a buyer's escrow check into her personal bank account. This violation is called:

   • AConcealment
   • BConversion
   • CComminglingcorrect
   • DCulpable negligence

   Why: Mixing client funds with personal funds is commingling. If she then spends the money, the violation escalates to conversion.

   Practice of real estate

   Key term: conversion

2. 2. A sale collapses and the buyer and seller each demand the $15,000 deposit the broker holds in escrow. Until the dispute is resolved, the broker should:

   • Areturn the money to the buyer, since the buyer is the one who supplied it.
   • Bkeep the funds in trust pending written agreement, mediation, arbitration or a court order.correct
   • Crelease the funds to whichever party the broker believes has the stronger claim.
   • Ddivide the deposit evenly between them and close the transaction file.

   Why: A broker holding disputed money is a neutral custodian with no authority to decide who owns it, so the funds stay in trust until the parties agree in writing or a neutral resolves it. Paying either claimant on the broker's own judgment invites liability and license sanction.

   Contracts

3. 3. The escrow or settlement agent conducting a closing acts as:

   • AA neutral third party carrying out the instructions of both partiescorrect
   • BAn agent of the lender only
   • CA substitute for the listing broker in handling the details of the transaction
   • DAn advocate advancing the interests of the buyer

   Why: The settlement agent is "A neutral third party carrying out the instructions of both parties" and may not favor either side. Acting as an advocate for the buyer would breach the impartiality that escrow depends on.

   Transfer of title

4. 4. An escrow agent's role in a real estate closing is best described as:

   • AA substitute for the buyer's own attorney in reviewing the closing documents
   • BAn advocate for whichever party opened escrow
   • CA neutral third party who follows the parties' joint written instructionscorrect
   • DA fiduciary for the lender alone

   Why: The escrow agent is a neutral third party who follows the parties' joint written instructions and may not favor either side. Acting as an advocate for whichever party opened escrow would violate the neutrality that defines the role.

   Contracts

5. 5. A lender sells a closed loan into the secondary market but keeps collecting the payments and administering the escrow account. The lender has:

   • AViolated the borrower’s right to consent before the note is sold
   • BRetained the servicing rights while transferring ownership of the loancorrect
   • CConverted the loan into a portfolio loan
   • DMade the sale conditional, so ownership passes only at payoff

   Why: Ownership of the debt and the right to service it are separate assets, so an originator can sell the loan and keep servicing it for a fee. That is why a borrower may go on paying the same company long after it stopped owning the loan, and no borrower consent is needed for the sale itself.

   Financing

6. 6. A buyer’s loan requires two months of hazard insurance reserves at $1,860 a year plus three months of tax reserves at $6,120 a year. The total escrow reserve collected is:

   • A$1,530
   • B$1,840correct
   • C$2,175
   • D$2,650

   Why: Insurance: $1,860 ÷ 12 × 2 = $310. Taxes: $6,120 ÷ 12 × 3 = $1,530. Total $1,840. The $1,530 option is the tax reserve alone, offered to catch anyone who stops after one line.

   Real estate math (calculations)

7. 7. An Alabama management agreement ends. Within how many business days of its effective termination must the qualifying broker provide the landlord or new manager the required escrow accounting and funds?

   • A3
   • B7correct
   • C10
   • D15

   Why: Rule 3-.03(6)(c) requires the accounting and payment within 7 business days after management termination. The covered funds include security deposits, prepaid rents and related escrows, rather than management fees alone.

   Practice of real estate

8. 8. During an office inspection of an Alabama real estate company, Commission staff may ask the qualifying broker for bank statements with canceled checks for the escrow or trust accounts. For how many past months does the rule list statements?

   • A3
   • B6correct
   • C12
   • D36

   Why: Rule 790-X-3-.09(2)(f) lists copies of the past 6 months of bank statements with canceled checks for all escrow or trust accounts among the records that may be requested. 36 months is the separate three-year record retention period.

   Practice of real estate