Kovats Real Estate School Practice Test 2026 - Free Real Estate Practice Questions and Study Guide

The term "escrow" in real estate transactions specifically refers to a financial arrangement where a third party holds funds or documents until certain conditions of a contract are met. This process is crucial in real estate because it provides a level of security and trust for both the buyer and the seller during the transaction.

In an escrow arrangement, funds typically related to the purchase of a property, such as earnest money deposits, are held by the escrow agent until all terms of the sales agreement are fulfilled, such as completing inspections, clearing title, and finalizing financing. Only after these conditions have been verified does the escrow agent release the funds to the seller and the property to the buyer. This helps to protect all parties involved and ensure that the transaction proceeds smoothly.

In contrast, the other choices relate to different concepts in real estate. A loan agreement pertains to financing and borrowing, which does not encapsulate the essence of escrow. A legal document defining property boundaries deals with land surveying and ownership disputes rather than financial arrangements. A direct sale without intermediaries refers to situations where buyers and sellers transact without the need for agents, bypassing the levels of protection and security that escrow provides.