Escrow Monies- What Happens To Your Deposit in a Real Estate Transaction?

escrow monies what happens to them in a real estate transaction

Deposit Money is a good faith deposit, or earnest money deposit that is tendered on the purchase of real estate which is then kept in an escrow account.  You will sometimes hear your deposit called escrow monies as well. The term escrow monies are used because most likely your deposit money will be kept in an escrow account.

Massachusetts is a two contract state, typically a contract to purchase is signed (often called the offer) with a good faith deposit of typically $500 to a $1000.  Then with-in a week or two a purchase and sale is signed and a balance of typically 3-5% of the purchase price is tendered as the balance of the good faith deposit.

As a home buyer and home seller it is important to know what will happen with the deposit money held in an escrow account.

Why Should a Home Buyer Provide a Good Faith Deposit?

Your deposit monies are just that.  A good faith deposit.  You are showing a seller that you want to buy their house and you are putting your money where your mouth is. 

In general your good faith deposit is  protected by any number of contingencies in a real estate contract.  But at some point, your deposit money may become at risk if you do not perform for a variety of reasons. 

Typically, while there is no hard fast rule, a seller wants about 5% tendered as a good faith deposit by the time a purchase and sale is signed.  If you should not perform on your contract this is usually enough to compensate a seller for any additional cost incurred because of your non-performance.

Your deposit money like anything is a negotiating point in a real estate contract.  A seller can feel more confident with you if you are willing to put down a larger deposit.  And as mentioned earlier, if handled properly the deposit monies are  kept in an escrow account, should always be protected by contingencies in the contract, while creating little to no risk of losing your deposit money.

What Happens to the Deposit Monies?

Most Real Estate Brokerages and Attorneys are Escrow Agents.  By law, escrow accounts are separate accounts managed by a third party to “hold money that is not theirs”. No other monies may be co-mingled with the escrow account and very strict accounting is applied.  No one can touch that money for anything except to close on the property or returned if to the buyer if both buyer and seller agree.  The seller does not have access to the money, the brokerage can’t use the money to pay it’s bills, etc….

Most real estate contracts will spell out who will be holding your deposit money in escrow and how a dispute will be handled.  Another important note is that escrow funds cannot be released unless both parties agree.  Obviously, if the transaction closes then both parties agree to release the escrow monies.  

There are typically two contingencies in the contract that allow the buyer to withdraw from the transaction of the deal and one contingency that allows the seller to withdraw from the transaction with all monies returned to the prospective buyers and no recourse from either party.

Buyer Contingencies

  1. Most contracts allow for a mortgage contingency.  If a buyer does not receive a mortgage commitment (a conditional commitment from the bank that guarantees the money at closing) by a certain date then escrow deposit monies will returned to the buyer.
  2. Most contracts will allow for a home inspection contingency as well.  A buyer will have a certain amount of time to conduct all inspections.  Usually the inspections are at the buyer’s sole discretion.  If there is something not to the home buyers liking, the home buyer can withdraw from the contract and all escrow deposit monies will be returned.

Seller Contingency

  1. Most Massachusetts Purchase and Sales agreements have language saying that the seller has a certain amount of time to provide a clear title.  Under this clause they, are committed to spend X amount of dollars and if they cannot after all reasonable efforts they can withdraw from the contract with no further recourse to the buyer and all escrow deposit monies be returned to the buyer.

What Happens to the Escrow Monies At Closing

Most often a purchase goes ahead and closes.  In that case the escrow monies are brought to the closing and is applied towards any money the buyer had to bring to closing like down payment, closing costs and pre-paids.

If there is an excess deposit any additional monies are returned to the buyer.

What Happens to Escrow Monies if the Home Buyer defaults?

What can happen?  A buyer gets cold feet, loses a job, or their credit profile can change.  As stated earlier you have contingencies to protect you through much of your escrow period.  But after your contingencies expire your deposit money held in escrow can be at risk. 

In Massachusetts, most contracts state that upon buyer default their escrow deposit money is the sole remedy to the seller.  The buyer cannot be sued for specific performance.  In the contract you have basically agreed to turn over escrow deposit monies to the seller if you should default.

What Happens to Escrow Monies if the Home Seller Defaults?

What can happen?  Sometimes a seller just changes their mind.  If the seller defaults then the escrow money deposits should be returned to the buyer.  In Massachusetts a buyer may be able to sue for specific performance as well as any damages incurred…. such as interim housing, moving costs etc…

Regardless of who defaults, it is important to note that for an escrow agent to release deposit monies both parties must agree or it needs to be court ordered. 

So say the buyer defaults but insist on getting their deposit monies back and the seller insists on keeping the deposit what happens? 

The escrow money will be kept in the escrow account until the parties come to an agreement or the courts order what is to be done with the deposits.  When the parties disagree is where it can get sticky.  Buyers and sellers think it is as easy as just getting access to the escrow deposit, but its not that simple.

If you are the defaulting party and it is clear you have defaulted and the parties cannot come to agreement, most likely if you go to court you will lose.  On top of losing the deposit, you will have also incurred legal costs to recoup the money.  If we are talking about a $5,000 deposit you are probably going to incur a minimum of $3000 to $5,000 to get the money held in escrow.  Not worth it.  If you are talking about $30,000 it may be worth letting the courts decide. 

Also, if you are the seller, while the money is in dispute you could be in a very sticky situation about whether you can go on to sell your house to another party.  All very grey area legally.

Protecting your Escrow Money Deposit

A good buyer’s agent will help you protect your escrow money deposit by understanding what risks you might have in the transaction.  More importantly a buyer’s agent will track the critical dates that help protect your deposit with contingencies.  Again the two most common contingencies are the home inspection contingency and the mortgage contingency with critical dates attached for performance.

There will probably always be a little bit of risk for your deposit money after all contingencies are cleared.  But that risk is usually very limited.  Yes you can lose a job at anytime but you shouldn’t be buying a house if you feel you are in risk of losing your job. 

Most of the risk is created by home buyer stupidity!! I am just going to put it out there…..; home owner stupidity.  Change a job at the last minute, change their credit profile, etc….  Keep everything status quo while in your escrow period on a home.

Final Thoughts

As a home buyer your deposit money is a negotiating tool and can show your are moving forward in good faith.  In general you have very little to no risk of losing your deposit money if handled properly.

Your money will be held in an escrow account.  While rare, if a problem should arise, be aware there are very strict rules governing the escrow monies held in the account. If the buyer and seller cannot come to terms over the escrow monies than the courts will have to decide.

When you first suspect that you will default on a contract, contact a real estate attorney immediately.  Provide your attorney with all the documents and contracts you have regarding the transaction.  There may be a simple way for you to withdraw from the contract with little or no financial loss to you. 

Or, if it is very clear you are defaulting based upon the contracts the attorney can provide you with the best route to go to minimize your losses.

Other Real Estate Resources:

updated from September 2nd 2012

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This post, Escrow Deposit Money, was provided by Kevin Vitali of EXIT Group One Real Estate.  Kevin is happy to answer any of your questions regarding the sale or buying of a home  and can be reached at 978-360-0422 at anytime.

Real Estate Services in the following areas: Northeast Massachusetts, Merrimack Valley, North Shore and Metrowest. Including the following communities and the surrounding area- Amesbury, Andover, Billerica, Burlington, Chelmsford, Dracut, Groveland, Haverhill, Lowell, Melrose, Merrimac, Methuen, Middleton, North Andover, North Reading, Reading, Stoneham Tewksbury, Tyngsborough, Wakefield, Wilmington, Westford

 

Comments

  1. says

    Keep in mind that when there is a smaller deposit a party to the contract may have the option of bringing a small claims action or demanding mediation or arbitration under the contract. You are so right about the cost of getting a deposit back. Paying a lawyer $3,000 to try to get back $5,000 probably just doesn’t make sense. One way to keep down cost is to request mediation or arbitration if there is a mediation/arbitration provision in the contract. Here in Maryland when someone comes in for a consult about a real estate deposit we often find ourselves having to advise someone on how to handle there own mediation or small claims case. In Maryland you can often handle a small claims case without a lawyer because the rules of evidence don’t apply.

    • Massachusetts Realtor says

      Hey Dave thanks for sharing that. Unfortunately the limit for small claims is pretty low in Massachusetts. I suppose mediation is an option if parties agree. Do you mediate many deposit disputes?

      • says

        The standard Maryland Association of Realtors contract has a mediation clause so we do get a fair number of consults on the issue. However even with mediation the issue of cost come into play. We probably end up representing someone in this type of mediation once or twice a year. Sometimes the client will try the mediation on their own and come back to us for Court if the mediation doesn’t settle the matter. Maryland’s small claims cases can be for no more than $5,000.00 plus interest and cost.

        • Massachusetts Realtor says

          Thanks for expounding on that Dave. I think its really important for folks to check their contracts and understand their local laws as it can vary widely from state to state.

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