Buyer deposits in escrow until a sale completes
How escrow protects a buyer's deposit in a Nigerian or Kenyan property sale, and how a developer or agent should record the deposit until completion.
By Achekam · · 5 min read · For Real estate businesses in Nigeria, Kenya
A buyer in Lekki pays a deposit on an off-plan apartment. A family in Nairobi pays a deposit on a plot in Kitengela while the title search runs. In both cases the buyer is handing over a large sum before they own anything, and in both cases the question that keeps them awake is simple: if the deal goes wrong, will I get my money back?
Escrow is one answer. It puts the deposit in neutral hands until the conditions of the sale are met. For the developer or the agent, it also clarifies something the books often blur: a deposit received is not yet money earned. This article explains how escrow works, and how a developer or agent in Nigeria or Kenya should record a buyer's deposit until the sale completes.
Escrow: money in neutral hands
Investopedia defines escrow as a legal arrangement in which a neutral third party holds funds or assets for two other parties until the conditions of their transaction are met. It notes that money, securities, funds and other assets can all be held in escrow, and defines an escrow disbursement as a payment made out of an escrow account.
The point of the arrangement is that neither side controls the money while the conditions are open. The buyer cannot take it back on a whim, and the seller cannot spend it before delivering what was promised.
The escrow agent's duty
Investopedia explains that an escrow agent's role is to manage and disburse the funds or assets it holds according to predetermined contractual obligations or appropriate instructions. The escrow agent is not a judge of the deal; it follows the agreement. That makes the wording of the escrow instructions in the sale agreement the most important part of the arrangement: what must happen before the deposit is released, to whom, and what happens if the sale fails.
Deposits held until conditions are met
Investopedia describes how, in a property sale with conditions such as passing an inspection, the buyer's good-faith deposit can be placed in an escrow account held by a third party, and is transferred to the seller once all the conditions of the sale are satisfied.
In Nigerian and Kenyan sales, the conditions are often different from an inspection: a clean search at the land registry, consent to transfer, completion of a building stage, or the buyer's mortgage being approved. Whatever they are, list them precisely in the agreement, say who confirms each one, and say how the escrow agent will be told. Ask your lawyer which escrow arrangements are usual and enforceable where the property is, because local law and practice decide that, not the general principle.
A developer's deposit is not yet revenue
For a developer, the deposit is a payment for something not yet delivered. Investopedia defines deferred revenue, also called unearned revenue, as a payment a company receives in advance for products or services it has not yet delivered, shown as a liability on the balance sheet until the company fulfils its obligations. It explains that this is a liability because, until it delivers, the company owes the customer the promised goods or services, or a refund if it cannot provide them.
That has two consequences. Where the deposit sits with an escrow agent, the developer has not received the cash at all, and it should not appear in the developer's bank or income until it is released. Where the developer holds the deposit itself, it is a liability, not sales, until the sale completes.
An agent holding money for others
An agent who receives a buyer's deposit and holds it pending completion is in a different position again. The money belongs to the buyer until the conditions are met, and to the seller after that. It is never the agent's income. Only the agent's own commission, once earned, is.
Check whether the law where you operate requires deposits held for others to be kept in a separate or designated bank account. Even where it does not, keeping them apart from the agency's operating account is the simplest way to show, at any moment, that every deposit is still there.
Accounts and journals that keep deposits separate
In Achekam, each business has its own double-entry ledger with a standard chart of accounts created when the books first open, and accounts can be added, renamed or switched off. Set up what the deposits need:
| Who | Account to add | Type |
|---|---|---|
| Developer holding deposits itself | Buyer deposits received | Liability |
| Agent holding deposits for others | Deposits held for clients | Liability |
| Either, if a separate bank account is used | The deposit bank account | Asset |
When a deposit arrives, record it with a manual journal: debit the bank account and credit the deposit liability. Achekam refuses an unbalanced journal or one dated in a closed month, and a posted journal is corrected only by a reversal, so the trail for each buyer's deposit stays intact.
Be careful with invoices. Issuing a customer invoice in Achekam posts it to the ledger as debtors, sales and output VAT. Raising a sales invoice for a deposit you have not yet earned would therefore put it into sales too early. For a developer, one approach your accountant may prefer at completion is to invoice the balance due and move the deposit from the liability into sales with a journal, so that the sale is recorded in full and the buyer's account shows only what is still owed. Agree the treatment, including any VAT, with your accountant before the first deposit arrives.
Once invoices are issued, customer payments are recorded against one invoice or spread across a customer's invoices. A part payment leaves the invoice part-paid, and any extra is held on the customer's account. A receipt can be re-allocated, and administrators can refund or reverse it, which matters when a sale falls through; when a sale falls through after invoicing covers that case. For the cash gap between deposits and completion, see cash flow between registrations.
Before the next deposit
Investopedia's guide to escrow explains how escrow arrangements protect both parties. Review your standard sale agreement's deposit clause with your lawyer, set up the deposit liability account, and record the next deposit there rather than in sales.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
