earnest money deposits - Posted by lew

Real Estate Investing Real Estate Financing
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Posted by JPiper on April 25, 1999 at 01:51:28:

Hugh:

Guess I overlooked the part where the seller agreed in writing to return $4K to you in return for your release. This would look like a solid claim to me. Further, I think you could pursue this if the seller doesn?t pay. If you pursue this through legal action you would record a lis pendens, which will tie the property up. Of course, this will have to be evaluated in terms of attorney fees. But for now, you may get a quick resolution here next week.

As to what the listing agreement says, obviously we don?t know. However if the seller is disputing the amount he is owed, my belief would be that the proper stance for the broker would be exactly what he is doing. Hold the funds pending a formal resolution. This is generally the accepted practice for handling escrow accounts. In my state it?s part of the rules and regulations.

My best guess is that the broker is due some percentage of the earnest money from the listing contract, which the seller may not have realized when he agreed to return $4K to you. But that?s not your problem, fortunately you got it in writing. Chances are the seller is now disputing what?s due him. Should be interesting how it turns out. If you have an opportunity I?d be interested in what happens. Good luck.

JPiper

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earnest money deposits - Posted by lew

Posted by lew on April 21, 1999 at 10:54:59:

Currently, I’m making a cash offers on investment properties.And the objective is to lock up the property for a few days to give my cash buyers take a look and set simultaneous close and assign the contract.(I just got around the hurdle of verification of funds). If the agent has a problem with the earnest money deposit, my thought was to roll any aditional amount, say for instance he want’s $500, is to roll the additional amount into the sell price. I need more suggestions for backup. Thanks everybody!!

lew

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The Realtor Refuses To Cut A Check!!! - Posted by Hugh James

Posted by Hugh James on April 21, 1999 at 11:41:54:

Put down as little as you can. Here’s a true story still in progress: We put up $10,000 to buy a commercial property. No mortgage contingency clause. Deal fell through and it’s our fault. Seller is entitled to keep the whole $10K. Instead, the seller (very graciously) signs a written agreement to void the entire deal and return $4,000 of the $10,000 earnest money to us. The selling Realtor (and yes, he is a real life Realtor) is angry, claiming that he is unhappy with the share of the remaining $6,000 the seller is offer him to help offset his out of pocket expenses. Bottom line – the Realtor refuses to disperse any of the earnest money he is holding to ANYONE. Soooooo, we’re off to ask for a formal hearing and an audit at our state Office of Banks & Real Estate. Sometimes I think the whole darned world is just getting crazier and crazier. Anybody ever have/hear a story like this?

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Here’s what I do… - Posted by Scott Britton

Posted by Scott Britton on April 21, 1999 at 11:28:53:

lew,

Here’s what I do… first of all… my contract says I will put up earnest money with the closing attorney only when the contract is accepted… and the Seller requests it. This often times side steps the problem.

If the Real Estate Agent is insistant… I tell her/him that I make a lot of offers (which I do) and tracking earnest money deposits is an accounting nightmare (which it is). That’s when I educate them about the acceptance thing. I’m more than happy to put up earnest money upon acceptance… but not until then. It’s just not necessary, is it?

If they still don’t get it… I will make a decision as to whether to cave in to their demands according to how much money I stand to make if my offer is accepted. For the right deal… I’ll wash their car if I have to :)!

But… the truth of the matter is… I rarely get asked for earnest money. I try and deal with people who want to make a deal… and quit wasting time with people who don’t.

As you know… earnest money is not a requirement of a legal and binding contract. It’s something the Real Estate industry hangs it’s hat on to make sure they will get paid. Sellers rarely care… or insist on earnest money.

Hope this helps!

Best of RealEstateSuccess!

Scott Britton

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Re: The Realtor Refuses To Cut A Check!!! - Posted by JPiper

Posted by JPiper on April 22, 1999 at 01:37:59:

This story doesn’t surprise me much. Most listing agreements provide for the listing broker to get a percentage of the earnest money in the event of buyer default. The typical percentage I see is 50%.

So here’s how it looks. Realtor produces a buyer…you. You write a contract and put $10K up in earnest money. Now you breach the agreement. Realtor by contract with seller is entitled to $5K. Meanwhile seller makes a deal with you giving you $4K back…leaving $6K to split with Realtor. Realtor’s share has gone from $5K to $3K.

Basically I would say that the seller has no right to make a deal with you with the Realtors money. The realtor is entitled to a specific amount through his listing contract. If the seller wants you to have $4K, he could pay the Realtor $5K, and keep $1K for himself. But I doubt the seller would agree to that.

If the seller didn’t like the arrangement regarding earnest money he could have negotiated it differently…as you could have too. Looks to me like the Realtor is probably entitled to his stance…by contract.

JPiper

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Re: The Realtor Refuses To Cut A Check!!! - Posted by Matt B

Posted by Matt B on April 21, 1999 at 14:52:08:

Hugh,
Luckily for me the amount I’m having a problem is much smaller than yours. I had signed 3 contracts to buy junkers through an agent who was supposed to be working for me. (HAH!) When I found out he was a weasel and lied about EVERY single “fact” he had provided me (comps, counter offers, etc.) I pulled out of all 3 deals. 2 sellers decided to keep the $500 a piece that I had put up, and one said I could have it back.

I have heard every story and threat a weasel real estate agent can come up with to try to get me to release the funds before I can get my $500 back. It came down to me telling him that when all 3 releases were signed by the sellers, I would come into the office and sign them, and walk out with my check. Easy, right?

For some odd reason, the seller who agreed to release my $500 back to me never received his release form. How odd! The other 2 sellers have already signed quite a while ago. This agent has been still calling me making threats that I was going to get sued (ME???) for “breaching the contract and then not releasing the funds”. I guess Joe Average would believe his BS, but I told him to read the part of the contract that talks about “specific performance” and go waste his idle threats on someone who didn’t know any better.

My last call was a threat to call the real estate commission for a review of his behaviour. He returned the call with a promise that the listing agent had just “forgot” to mail the release to the seller, and he should have it by Friday. How odd! The “listing agent” must have had a lot on his mind. Poor fella!

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Re: Here’s what I do… - Posted by Tyler

Posted by Tyler on April 23, 1999 at 01:59:45:

Scott,

Isn’t there a certain amount that must be used to make it an legally binding and enforceable RE contract? I always thought there had to be some money involved to make it “official”…?? Does this vary from state to state?

NT

by the way…thanks for a great talk at the convention in Dallas!

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It’s Not His Money! - Posted by Hugh James

Posted by Hugh James on April 22, 1999 at 17:04:08:

I agreed with you 1000% until you said the seller has no right to make a deal with the Realtor’s money. Sorry, but in our state the buyer makes an earnest money deposit in amount negotiated with the seller. That money is held by the listing broker “for the benefit of the seller.” It ain’t his money to settle up as he sees fit, he is simply the temporary custodian of funds that do not belong to him. In this case the seller is a major, global bank. They directed the lister – their agent – to disburse $4,000 of existing escrow funds – their money, since the earnest money was forfeited to THEM – to me in exchange for voiding the deal with a hold harmless agreement. If he’s entitled to 50% of the original amount, I have no argument, but it doesn’t affect my position. If he’s got a beef about his pay he needs to take it up with his employer, the seller, and not me. In this case, not only my attorney, but the seller’s attorney have all lined up against this guy. I fail to see how a Realtor can, legally or ethically, refuse to remit funds that have been forfeited to his client TO his client, as instructed. The case is headed to the bureaucrats Monday. We’ll see what happens. In the meantime, I am personally bewildered (as are others who have seen this) that a Realtor of 35 years standing would blow off a client of this size and risk a state audit over this amount of money.

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Legally binding contracts… - Posted by Scott Britton

Posted by Scott Britton on April 27, 1999 at 06:48:45:

Tyler,

For a contract to be legally binding and enforceable… there needs to be “consideration”. Most people mistake this for “earnest money”… but it’s not the same. There has been somewhat of a running battle for years as to what is “consideration” and who receives it. There are good arguments on both sides of the fence.

To avoid this problem… most savvy attorneys will put some type of language in their contracts such as “For and in consideration of $10 cash in hand paid… and other good and valuable consideration… the receipt and sufficiency of which is hereby acknowledged… the buyer agrees to buy… and the seller agrees to sell… the subject property under the following terms and conditions…”

You get the idea. This deals with the problem before it develops (or if it develops). The most important thing with Real Estate contracts is that they must be in writing to be enforceable in a court of law. Most of the rest of the language is designed to jocky for position… and avoid any problems or disagreements in the future. In other words… a meeting of the minds.

Hope this helps.

Best of RealEstateSuccess!

Scott Britton

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Re: It’s Not His Money! - Posted by JPiper

Posted by JPiper on April 22, 1999 at 21:36:06:

Here?s the wording from a local listing agreement: “SELLER AGREES TO: (e) Allow the BROKER to accept a deposit to be applied against the purchase price, and to place said deposit into the escrow account maintained by the BROKER or other Escrow Agent until closing of the transaction. In the event such deposit is forfeited by the buyer, 50% of said deposit shall be retained by the BROKER, provided, however, that said amount retained shall not exceed the amount to which the BROKER would be entitled as a commission, and the balance of said deposit then be paid to the SELLER.”

This is an agreement between the listing broker and the seller…a contract. Therefore, IF the seller in your case had signed an agreement of this type, the disposition of the earnest money is quite clear. $5K to the listing broker and $5K to the seller. If the seller wishes to give you $4K back, then this agreement would not preclude that. In that event, the disposition of earnest money would be $5K to the broker, $4K to you, and $1K to the seller. The constant here is that the broker is due $5K in any event, regardless of what you and the seller agree to.

Here?s what wouldn?t happen under this agreement. Seller agrees to give you $4K. That leaves $6K remaining. Now the seller wants to split $6K with the broker…leaving the broker with $3K, not the $5K provided for in the agreement.

Did the listing agreement contain language of this type? I don?t know, you don?t say. You probably haven?t seen it. There?s a decent chance the seller didn?t read it. There?s a decent chance that the seller figured he?d give you $4K and keep $6K…but the broker has balked…because that?s not what the listing agreement said.

Is the broker justified? He may well be, under the contract. Tough as it may seem, the party that seems to have no sound contractual footing under the contract is you. You mistakenly put up $10K earnest money with no financing contingency…and then couldn?t perform. Under the contract you?re entitled to 0. Again, the seller can agree to give you any portion of what he?s entitled to. He just can?t give you that which the broker is entitled to. Again, I would bet that the seller was NOT willing to settle for $1K, with you getting $4K and the broker getting $5K. I would bet that the seller was only willing to give you $4K if the broker didn?t get his $5K.

By the way, any dispute over earnest money would by state law preclude the broker from disbursing earnest money to anyone pending a resolution of the dispute. Therefore, the broker is simply complying with the law. A state audit will not reveal anything improper.

Is the broker ethical here? Again, I?ll leave that for you to decide…evidently you don?t think so. But if there is a contract similar to the one quoted above, the broker is well within his legal rights. The ethics I would question here (if the contract says something similar to the above) are the lawyers who are collecting fees by giving you and the seller bad advice. If a written contract means nothing, then what does that say about the parties? ethics?

JPiper

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Re: It’s Not His Money! - Posted by Mark R in KCMO

Posted by Mark R in KCMO on April 22, 1999 at 19:00:27:

Hugh,

I don’t know what your contract specifically says, I can’t see how the realtor can tell the SELLER what they can do with THIER money??

Next thing you know the realtor will require the sellers first born at the signing of the listing agreement!

Mark

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Re: Legally binding contracts… - Posted by Cathy

Posted by Cathy on April 29, 1999 at 20:02:22:

And other essentials in a legally binding contract: Competent parties, in Writing & Signed, Legality of object, Offer & Acceptance, and of course Con$ideration. Only Valuable consideration is sufficient to enforce a contact. Good consideration (love,affection,gift) is not enforcable. This is in Fl, other states may be different.

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Well, I ALMOST Agree With You - Posted by Hugh James

Posted by Hugh James on April 24, 1999 at 19:44:36:

Right…We couldn’t perform. Right, we’re entitled to -0-. Our position is that we just don’t care how he splits the remaining $6K. That’s between him and his client. If the contract between lister and seller is as you say (we asked to see it, he refused) then he has MORE than enough to satisfy his $5K claim. Let him keep his five thousdand, and remit one thousand to his client and take it from there. I think he’s wrong to hold us up when, if the listing agreement is as you suggest, he has more than enough left after paying us to satisfy what he would seem entitled to. As to whether or not an audit will reveal any impropriety, we would have no way of knowing, although it looks like we’ll find out. My personal opinion is that he’d just as soon not tangle with a multi-national bank with very deep pockets should they choose to sue him. As for the error of our ways inputting up 10G’s and then not being able to perform…well, we’ve had better days. You should note–we didn’t ASK for any of this money back – they OFFERED. Lawyers aside, I don’t think we’ll be looking any gift horses in the mouth to the tune of four grand. In any event, the bureaucrats notified us late Friday they’ll seek the brokers response at a hearing. I agree with you about the quality of a written agreemnt. But we also now have a contract with the seller – remember, this was their idea – to disburse $4K to us in exchange for the voiding of this agreement and a hold harmless agreement not to pursue this further. We were doing a little thinking today, wondering if there’s someway to put a $4,000 lien on the title to this property until we do get paid. Ah, the wonders of a life in real estate. Works for me.