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Earnest Money – What Everyone Ought to Know (Article by Mark Schedler)

By Mark Schedler

When a transaction fails the earnest money is NOT automatically delivered to the rightful party. Here is what every buyer, seller and real estate broker should know about how earnest money is handled when a transaction fails:

  • The agreement does not control the outcome. When the escrow agent holds the earnest money it will need new consistent written instructions from the parties to disburse the money to either of them. When a broker holds the deposit it may be able to disburse the money directly.
  • The agreement could require the escrow agent to “interplead” the earnest money if consistent instructions are not delivered within a stated period of time.
  • To avoid interpleader while they work things out, the parties can instruct the escrow agent to continue to hold the money pending further instructions.
  • Interpleader is a lawsuit. Like all litigation, it begins with a “complaint”. The buyer and seller are defendants. The complaint is “served” on the parties by the local sheriff.
  • Getting served with a lawsuit is unpleasant.
  • In interpleader, the escrow agent is the plaintiff, but it seeks no money or other remedy. Once the case is begun and the money is given to the court, the escrow agent is done.
  • Without lawyers, the parties will be on their own in the lawsuit. There is no judge, clerk or other government employee to swiftly see that justice is done.
  • The process does not adjust itself to the size of the earnest money. Most earnest money deposits are less than the legal fees that would be spent arguing over them.
  • A party who simply does nothing could end up with a judgment against them for the attorneys fees of the other side and the court costs of the Interpleader.
  • Most parties eventually split the earnest money to settle their dispute. Some do it immediately. Some spend many hours and dollars to come to the same result.
  • Good brokers can often help their clients resolve earnest money problems and get those consistent written instructions to escrow quickly. Lawyers with experience in these matters can also help resolve matters where possible.
  • Buyers can limit their risk by depositing their earnest money with in their broker’s trust account. While this can limit the risk of a problem few brokers have trust accounts for this purpose. Coldwell Banker Bain and Coldwell Banker Seal are two brokers that still maintain trust accounts.