Recently a client of one of our agents wanted me, as our agency’s Designated Broker, to compose a “Letter of Assurance” guaranteeing their earnest money would be returned to them if they employed a certain tactic. (See Earnest Money ”“ What, why, how much? for an explanation of what earnest money is.)
The short answer is no, I can not make any assurances of what may happen to your earnest money.
“Say what?” the client is probably thinking. They hand over a check, sometimes for a significant amount of money, and I as one of the brokers in the transaction can’t guarantee what will happen to their funds? That doesn’t sound right”¦
Here’s the deal. Earnest money, and how it is distributed in the event of a contract dispute between the parties involved, is handled by the escrow company. This is all spelled out in Section 3f of the standard Arizona Residential Resale Real Estate Purchase Contract:
Release of Earnest Money: In the event of a dispute between Buyer and Seller regarding any Earnest Money deposited with Escrow Company, Buyer and Seller authorize Escrow Company to release Earnest Money pursuant to the terms and conditions of this Contract in its sole and absolute discretion. Buyer and Seller agree to hold harmless and indemnify Escrow Company against any claim, action or lawsuit of any kind, and from any loss, judgment, or expense, including costs and attorney fees, arising from or relating in any way to release of Earnest Money.
Or, in plain English non-legalese speak, the escrow company decides who gets the earnest money and if you don’t like their decision there isn’t much you can do about it.
So back to our original question; can I guarantee how the escrow company will distribute your earnest money in the event of a dispute? Absolutely not. It’s up to them to decide, and you agreed to that when you signed the contract. Will I go to bat for you in the event of a dispute? You bet I will. But ultimately the decision rests with the escrow company.
Does this seem silly? On the surface, probably. Consider the alternative though”¦ An escrow company is a neutral third party in the transaction. As such, they are in the best position to make decisions that affect how earnest money is distributed between parties to the contract. The only other alternative would be to have brokers on both sides decide, and clearly that wouldn’t work as the buyer’s broker would side with the buyer and the seller’s broker would side with the seller. Every time. Nothing would get decided and it would wind up going in front of a judge or jury ”“ another neutral third party, and not an inexpensive option.
That’s why this decision is left in the hands of the escrow company. We can tell you based on experience what the escrow company is likely to decide, but we can’t make promises about things we have zero control over. Contrary to popular belief, escrow officers are people too, and as human beings they are not infallible. In the trickier cases, it’s not one person at the escrow company that makes the decision. A bevy of attorneys can be involved, and yes they are people too. Really. The decisions escrow companies make with regard to earnest money disbursement is almost always spot on.
Just don’t ask me to guarantee that and write you a check if you disagree with their decision.
IMPORTANT NOTE: All of the above pertains to real estate as it is commonly practiced in the state of Arizona. Real estate law and practices vary by state. Your state laws and practices may be entirely different than Arizona’s. In addition, real estate contracts can be modified and changed on an individual basis. The boilerplate language shown here is just that ”“ boilerplate that could have been modified in your contract. Always consult with your agent on specifics to your contract and transaction.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
I agree with the content of this topic; but what needs to be pointed out is that everything is negotiable prior to seller accepting the contract. If you provide a addendum that satisfies your buyer’s demands and send a copy or escrow instruction the above issue can be resolved.
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Nothing is in stone in Real estate the buyer & seller can make any deal they want provided all parties sign off on it.
Wow what a question- I clearly make it clear when it comes to earnest money, accepted offers, etc that this world is complex and we as realtors and loan officers can only do our best. Nothing is an absolute in real estate. Great article this time and well ok everytime. I love reading them 🙂
You might not be able to sue the escrow company, but you could bring an action against the person who ended up with your earnest money (if you really believe they shouldn’t have gotten it).
I personally have a dispute going with one of my sellers over an earnest money release. The buyer’s Realtor actually stated to me over the phone that the earnest money must be released and that it always goes back to the buyer. Too many people do not understand its significance in relation to a contract. This is a good blog to help bring that to light.
Thanks for sharing.
Thanks for very interesting post. I have a high regard for the valuable information you offer in your articles. I really believe you will do much better in the future
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Hi Jay. I love reading your blog. Right to the point in easy language. I think it is a bit bizarre that people will read and sign the contract, yet think that someone else should be responsible if they don’t meet the terms of the contract. Whether or not they get their money back is primarily based on how they conduct themselves per the contract. Here in TX the contracts are pretty crisp about what each side is agreeing to do and in what timeline.
The escrow companies are usually on the ball when it comes to resolving earnest money disputes. It’s not like they randomly award the money how ever they feel like. As Jay mentions they have a team of lawyers and agents going through all the paperwork and more likely than not will end up with a fair and sober decision.
I’ve had a couple of times where deals have fell through and the earnest money needs to be released to one party or the other. Luckily i’ve never had a dispute where it wasn’t obvious where it needed to go.
Interesting. In GA the EMD is held by either the listing broker or the buying broker. Most commonly the listing broker.
Whoever holds the EMD becomes the one that ultimately gets to decide the fate of the EMD.
If there’s a big nasty argument over it, I think it gets mediated by the GAR, but I’m not sure about that.
I’m about to go for my Brokers License, after which I can fully answer this Q in GA.
ps. Found a typo for ya: “They had over a check”