ALTA Practice Exam – Complete Prep Resource

The primary purpose of escrow in a real estate transaction is to manage and protect funds and documents during the transaction. Escrow serves as a neutral third-party mechanism that holds funds, such as the buyer's deposit or down payment, and important documents, including the purchase agreement and title documents, until all the contractual obligations are fulfilled.

This ensures that both the buyer and seller are protected; the buyer is assured that their money will not be released until all conditions are met, while the seller can be confident that they will receive their payment once the title transfer is properly completed. This process minimizes risks associated with real estate transactions, such as fraud or non-fulfillment of contract terms, by ensuring that neither party has access to the funds or documents until the agreed-upon conditions are satisfied.

The other options do not accurately capture the primary function of escrow in real estate transactions. Handling title searches and insurance relates more directly to title companies rather than the escrow function. Arranging for property inspections is typically the responsibility of the buyer or their agent, rather than escrow. Lastly, negotiating purchase agreements is primarily the role of real estate agents or attorneys involved in the deal, rather than the escrow process.