13

Escrow services seem to typically require earnest money funds to be deposited via wire transfer. These days the wire transfer instructions will be surrounded by 50-point bold red text warning you that wire fraud is on the rise and you must be extra careful to follow the original wire transfer instructions exactly, call the escrow service to verify the account details, and ignore any phone calls, emails, or text messages you receive with "new" wire transfer instructions.

On the other hand, if the sale doesn't work out, the escrow service will refund your deposit with a check.

I understand why wire transfers are prone to fraud. What I'm less clear on is why they're still the standard for escrow deposits.

I have some guesses about why escrow services might reject other payment methods, but I'm not sure if they're sound:

  • Checks can bounce (or in some cases be reversed)
  • ACH transfer limits from most banks aren't enough to accommodate the deposit sizes in hot modern markets
  • Nobody wants to put a big deposit on their credit card, even if they have a big enough credit limit (plus it might tank your credit rating and affect the mortgage approval process)

Does that about cover it, or are there nuances or other explanations I haven't thought of?

7
  • Your three points seem reasonable to me. #2 was my first thought.
    – RonJohn
    Jun 11 at 5:10
  • For #3, you could use a debit card, or you could pay off the balance before it gets reported.
    – user71659
    Jun 11 at 20:43
  • Credit/debit cards also typically have transaction limits (per-purchase or per-day) that are far smaller than a typical real estate transaction amount. Even if there is no explicit transaction limit, putting a down payment on plastic would almost certainly trigger your bank's fraud detection systems as an unusual transaction.
    – bta
    Jun 11 at 22:00
  • 5
    This question urgently needs a USA tag. It is a reasonable question and there are good answers in a US context but essentially everwhere else in the world large money transfers are made as direct account transfers with no or neglible fees. Without knowledge of the quirks of US banking this whole discussion reads very strange and the obvious answer appears to be missing.
    – quarague
    Jun 13 at 9:52
  • 1
    As a European, I have no clue if our bank transfers are more like US wire transfers or more like US ACH transfers, which means I can make even less sense of the question.
    – gerrit
    Jun 13 at 16:00
44

Escrow services exist to reduce counterparty risk. By requiring each party to post their assets in a trade first, the escrow service can guarantee that the trade will either execute fully, or not at all.

To make this guarantee, the escrow service needs to be sure you really have the assets you are bringing to a trade. This is why a personal check is no good: you may not actually have the funds, and the escrow service may not find out for weeks. It's also why they will require title insurance if an exchange of real estate is involved: they need a guarantee that the seller is actually allowed to sell the property.

Wire transfers, unlike personal checks, for the most part can't be reversed. Your bank won't allow you to send money you don't have, and as long as the bank followed your instructions correctly, they won't reverse the transaction just because you changed your mind. So when you receive a wire you were expecting, you can be sure that money is yours.

This makes wire transfers good for escrow services, but it also makes it good for scams. If you tell a bank to wire money to a scammer and they follow your instructions, they won't reverse the transaction just because you changed your mind.

This is why escrow services and scams use wire transfers: they have a common need for a way to send money that can't be reversed.

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  • 3
    Doesn't cashier's check have the same properties?
    – n0rd
    Jun 12 at 4:33
  • 1
    Yes, it is possible to buy a house with a cashier's check.
    – Robyn
    Jun 12 at 10:19
  • 5
    Not really. Cashier's Checks are easily and commonly forged.
    – jwh20
    Jun 12 at 10:19
  • 3
    The escrow service would have to verify that the cashier's check is valid, not take it on faith. But yes, you really can buy a house with a cashier's check.
    – Robyn
    Jun 12 at 10:28
  • 1
10

While wire transfers are prone to fraud, so are others methods of transferring money. Wire transfers are expensive, there by limiting their use to the transfer of large amounts of money (typically).

The bottom line is that there is no more reliable way to transfer money quickly than wire. Many occur each day with no issues. Like anything else, those with less experience in wire transfers are more likely to be defrauded. Also they can be easy targets as they may announce on social media that they are buying a home. Real estate transactions are the most common reason the typical consumer wires money.

IMHO, it is an industry ripe for disruption but until banking gets on board with an alternative means, for now we have wire transfers.

Escrow services only use wire transfers for large amounts of money. When one uses escrow to pay their property taxes and home insurance, that is typically done by ACH and checks.

6
  • Actually credit cards are the most reliable method of transferring money. An irrevocable promise to pay is exchanged in seconds, and if a transaction is fraudulent, done in person, and basic technical standards are followed (such as having a EMV terminal), then neither party loses any money: the bank absorbs the loss. The difficulty is that somebody pays for this liability, and therefore credit cards are expensive for large payments. It's hard to come up with something to disrupt outside our spectrum of credit, ACH/Check 21, and wire, because there's simply no free lunch.
    – user71659
    Jun 11 at 20:16
  • 15
    The credit card promise to pay is very much conditional, and in many circumstances gives the purchaser a time-limited right to cancel the whole sale. Given such limitations, "irrevocable" is misleading at best @user71659.
    – Ben Voigt
    Jun 11 at 21:06
  • 1
    @BenVoigt Not true. That is the actual term used by credit card networks. When authorizing a transaction, the issuing bank provides an irrevocable promise to pay the acquiring bank. That means if, for example, the cardholder reports fraud within minutes, and the rules place liability with the issuer, the issuer still must pay the fraudulent transaction during the normal clearing cycle a few days later. Such an irrevocable promise is also present in other real-time messaging networks, such as Zelle.
    – user71659
    Jun 11 at 21:52
  • 6
    @user71659: But those aren't the parties which are important to the escrow. The implementation detail that "we don't cancel scheduled transfers, we create an offsetting reversal transaction" does not matter. Furthermore, the clearing cycle calculates NET transferable between banks, so if the offsetting reversal makes it into the same batch then it does cancel the transfer.
    – Ben Voigt
    Jun 11 at 21:59
  • 2
    @BenVoigt The reason why wire transfers are expensive is they require immediate clearance of funds. Whereas Visa and Mastercard have strict solvency requirements for participating banks (and also have an insurance mechanism), the global wire system does not and cannot discriminate on this basis. SWIFT doesn't trust promises, they require you pay up on the spot. This reduced liquidity and opportunity for netting is why credit networks are more popular and efficient.
    – user71659
    Jun 11 at 22:01
7

Wire Transfers are the convenient way to make a large, non-reversible, fast, no-problems payment - once they get money through a wire transfer, they can be sure it is real and irreversible.
They don't care about the associated (ridiculous) fees, as the customer has to pay them.

P.S. I'd love to be able to put a down payment on a Credit Card! - I would get a gazillion miles, and pay no wire fees. The reason they don't accept it is that credit card providers charge a transaction fee between 2-5% to the business - and they certainly don't want to lose 2000 - 5000 of your $ 100000 downpayment.

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  • 3
    "and they certainly don't want to lose 2000 - 5000 of your $ 100000 downpayment." Of course, they'd charge you a convenience fee to cover the transaction fee.
    – RonJohn
    Jun 11 at 15:03
  • I can certainly see the potential problems with credit cards, but - other than being fast, and nothing else about real estate transations is fast - why wire transfer rather than ordinary 2-3 business day ACH transfer?
    – jamesqf
    Jun 11 at 15:35
  • 9
    @jamesqf - reversal risk. If your bank finds out you never had the money you ACH’ed (bad check deposited or such), or the transfer was fraud, they’ll take it back.
    – Aganju
    Jun 11 at 15:41
  • Even if you have a $100k credit limit on your card, you'd run the risk of the underwriter throwing a fit when they saw you had $100k of debt (unless you paid it off immediately). But transaction fees are a good point I hadn't thought about.
    – user45623
    Jun 11 at 18:34
  • 1
    Yes, non-reversibility is the main reason. Cryptocurrencies like Bitcoin could easily fulfill that requirement - but they have other problems (high volatility, lack of regulation, accessibility/popularity, liquidity etc.) Jun 13 at 14:48

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