Real Estate Deposits 101: Part 2 of 2

By Travis Close, President

Greater Chattanooga Association of Realtors

In continuing with last week’s topic on Earnest Money, there are a few additional questions that often arise about these deposits made by the buyer when entering into a real estate contract.

Does the seller have any recourse if the buyer never provides the earnest money deposit? What if the check bounces? When putting their home on the market, sellers take some risks. It’s not uncommon for sellers to become frustrated when a transaction appears to be in jeopardy – they’ve lost time on the market because of a buyer’s failure to perform according to the contract. However, the standard purchase and sale agreement available to Realtors by the Tennessee and Georgia Associations includes language to protect the seller in such situations. In the contract, the parties designate the entity (often a real estate firm or title company) to hold the money. When the money is not remitted in accordance with the contract, the holder should give notice to the parties. Typically, the buyer then is put on notice to remedy their breech within a specified time. And if not, the seller may exercise their right to terminate the agreement and get their home back on the market as quickly as possible.

Why did the builder ask for more money after we already had a contract?When purchasing new construction, it’s common for the buyer to request upgrades or customizations that were not considered in the original plans or purchase price. In this scenario, the buyer is asking the builder to incur additional expenses. Builders are glad to customize to the buyer’s liking, but it comes with a price to enable the builder to cover their costs for the additional time, labor and materials.

Is it legal for the earnest money to earn interest for the holder? Yes. The real estate laws allow the holder to earn interest on the money, which should reside in an account designated for the purpose of holding such deposits.

Can the holder use the money for other purposes? No. Both the Realtor Code of Ethics and the licensing law require the monies be held in an account separate from other funds and cannot be co-mingled with holder’s personal funds. The money is to be applied at closing as a credit toward the purchase price. Should the contract does not come to fruition, the monies should be disbursed not to the holder but to either buyer or seller – or both parties should they agree to split the money upon termination of the contract. Regardless, the money belongs to either seller or buyer. Thus, the reason the monies are to be held in a special account and only used for the purpose of holding the money until disbursement per the contract.

If the transaction doesn’t close, who gets the earnest money? Should holder of the funds be unwilling or unable to make a reasonable interpretation of the failed contract and disburse the money, the holder may ask the parties to agree in writing how the money will be disbursed. Alternatively, the holder may file an interpleader with the courts. In essence, the holder is asking a judge to make an interpretation and determine to whom the money shall be disbursed. In most cases, the ruling will include the holder of the funds being reimbursed for any costs associated with filing the interpleader.

While uncommon, it is possible for a real estate contract not to require the buyer make a deposit. However, we strongly advise against this practice, as the purpose is to provide the seller some assurances they buyer intends to perform. A buyer is expected to act in good faith in accordance with the terms and conditions of the contract, while also having confidence the seller will not change their mind about selling the property. As we advised last week, carefully review the sales agreement to avoid any surprises. And rely on your Realtor to guide you from listing and offer to contract and closing.

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