In today’s housing market, it is becoming an increasing occurrence for homebuyers to walk away from closing. Walking away from closing happens far more in buyers markets than sellers markets. Many buyers are afraid of further declines in the market and depreciating home values.
A home may have decreased in value by as much as half its value in today’s market by the time closing time is approaching. The purchase is no longer appealing and the buyer cancels, perhaps a day or two before closing. Who is entitled to the escrow money?
What is the purpose of the escrow deposit? The escrow deposit on a home, also called earnest money, is money given to a seller when an offer of purchase is signed. An escrow deposit shows the seller that the buyer is serious, “earnest” about buying the property. It is designed to protect the interest of both parties until the closing has taken place.
Buyers who are not following through with purchase will often forfeit their deposit. Real estate contracts are usually in favor of the seller. Many conditions have to be met for one to being entitled to a return of deposit.
The answer to who gets the money should lie in the Contract that is executed by the Seller and Buyer. Once the contract has been fully executed, the deposit belongs to both the seller and the buyer and cannot be released except by agreement of both parties.
An escrow account is opened and the check is deposited with a neutral third party. In some states it is an escrow company, in others states it may be a title company that performs escrow duties. It the parties are in disagreement, there will be a dispute. Every state has different guidelines for solving escrow disputes.
Most states have agreements stating that if the buyer backs out of the transaction for any other reason than the contingencies listed within the agreement, the escrow deposit is split between the seller and their agent. The buyer must sign a release in order for this to happen. If the buyer refuses to sign the release then the escrow agent holding the deposit refers to the instructions of the court.
There are two types of legal contracts, written or oral. The law considers a contract to be binding if two or more parties verbally agree without having a written contract. However, oral contracts may not be enforceable. Certain oral contracts are legally unenforceable because of the high risk of fraud involved. Unenforceable contracts include:
· Contracts selling or purchasing land
· Contracts selling and purchasing goods priced at $500 or more
· Prenuptial or Marital settlements
· Contracts unable to be performed within a year of the contract date
Conveyances of title to real property must be in written agreement form. There will be a purchase agreement and document relating to the purchase such as mortgage, financing agreement, deed (recording the transfer of title), required inspections, an escrow agreement, and title policy (insurance policy from a title company that guarantees the title search and that the property is free and clear of other claims).
If any duties by buyer or seller are negligent in this period before closing their rights to escrow may be negated. It is the sellers duty to care for the property and protect it from damage during the transaction period. The purchase agreement generally enables the buyer to be released from the purchase when defects are discovered or financial agreements cannot be completed. Buyers have a general duty to make reasonable investigation to discover defects in the property.
Purchase agreements may have contingency clauses. Such clauses by the seller could include situations where the deal must be approved by family members. If the buyer signs such an agreement, the seller is able to back out if the condition is not met.
If the seller or buyer does not meet contingencies, such as time limitations met for the performance of necessary inspections; either may well forfeit rights to escrow. Buyers and sellers are able to place clauses into purchase agreements guaranteeing the return of a deposit or the forfeiture of a deposit.
If the parties cannot agree to the disposition of the escrow, the seller and buyer will need to settle the dispute, through either arbitration or filing a lawsuit, in which the specific language of the agreement is considered.