What is an escrow deposit?
It's a good faith deposit but not to be confused with a down payment. When buyers execute a purchase contract, the contract specifies how much money the buyer is initially putting up to secure the contract and to show "good faith". In just about every purchase of a home, the buyer is asked to make a deposit as a sign of good faith to the seller that the buyer is actually serious about purchasing the seller’s home. Once the buyer and seller reach an agreement on price and terms, this monetary deposit is deposited into a trust account (generally the real estate brokerage’s or title company's escrow accounts) and sits there until closing at which time it is credited to the buyer in the closing settlement statement.
How much the escrow should be?
Escrow Deposit is not mandatory, however is highly recommend. Escrow varies from market to market and across the country. Deposits are generally 1% to 3% of the sales price. Sometimes, a buyer may offer 1% with the contract offer and the seller may counter requesting an additional escrow deposit after some contingency is met, i.e. inspections. In buyer's markets as we are experiencing now, a larger earnest money deposit might entice a seller to accept a much lower purchase price. So you see, it all depends!
Who holds the earnest deposit?
Here are some important practices recommended to buyers and sellers by real estate professionals.
- Never give an earnest money deposit to the seller.
- Make the deposit payable to a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company.
- Verify that the third party will deposit the funds into a separately maintained trust account.
- Obtain a receipt.
- It is not advisable to authorize a release of your earnest money (or a pass-through) until your transaction closes.
-- Realtor must use an "escrow release form" which must be executed by both parties in the transaction.
Is Your Earnest Money Deposit Refundable Upon Cancellation?
First, read your contract. Laws vary from state to state. In Florida, purchase contracts allow for the return of the earnest money deposit to the buyer within a specified time period and contract guidelines should the buyer elect to cancel the transaction. Upon cancellation, the sellers and buyers are asked to sign the escrow release form according to mutual release instructions. If an agreement cannot be reached, the party holding the earnest money deposit will continue to hold it until an agreement is reached. Real Estate brokerages in Florida must follow the Department of Business and Professional Regulations (DBPR) specific steps when an escrow is in dispute. However, title companies, lawyers, or any other escrow company are not required to follow DBPR guidelines, consequently the legal system may intervene.
Why have escrow deposits at all?
Technically, the buyer could bring all the down payment money to closing, but in the majority of sales, in reality 99% of them, the deposit shows the seller that the buyer is truly serious about buying the seller's home. In reality, the buyer is asking the seller to take his home off the market for anywhere from 30-60 days in normal sales to months in the case of short sale transactions on the promise that the buyer can, and will, perform on the purchase. When the seller’s home is off the market, even in the current "active with contract" option, the seller may be missing out on other potential buyers’ offers; consequently, the seller wants some assurance that the buyer is ready, willing, and able to complete this purchase. Hence, a monetary good faith escrow deposit is not only advisable, it is encouraged; it is the best way that the buyer can demonstrate his good faith and ability to perform on the purchase contract. Likewise, realtors ask buyers to provide proof of funds on cash transactions or a prequalification letter if financing is involved to submit with offers.
Monica Richter, The Richter Team, Coldwell Banker Real Estate
Monica.richter@floridamoves.com
