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All About Escrow

How Escrow Monies Are Handled

The term "escrow" refers to any monies that are held in trust by a neutral third party in order to ensure that both parties to a contract fulfill their mutual obligations. In the home buying process, the earnest money put down by the buyer is not paid directly to the seller or the seller's agent. Instead, it is deposited in a special bank account by the buyer's broker or to the title company which will be serving as "escrow agent," to make certain the money is kept safe and not paid out to any party to the transaction until all obligations are filled.

The amount of earnest money may range from the nominal (it is not unusual for buyers to put down as little as $1,000 when they have arranged 100 percent financing) to a significant part of the purchase price. The amount may be limited by state statute, as is the case in California. There, a liquidated damages clause limits the seller to three percent of the purchase price to be paid as damages in the event of a default. No matter how large or small the deposit, though, there are strict regulations in place for how escrow monies are to be handled.

These regulations may vary slightly from state to state. In the District of Columbia, for example, once earnest money has been handed to the buyer's agent, that money must be deposited in a secure bank account within seven days of receipt. Kentucky, on the other hand, requires that the money be deposited within three days of receipt. Every state, however, requires that special accounts be created strictly for holding escrow funds. There are severe penalties in place for any real estate agent or broker who deposits these funds into a personal account or even into the brokerage general account. This is known as "commingling" of funds and can result in the broker and/or agent having his or her license revoked.

Paying Out the Escrow Monies

So what happens to these escrow funds once the real estate transaction has been concluded, satisfactorily or otherwise? The disposition of the funds should be spelled out in the sales contract, but in general, funds will be disbursed in any of three different ways:

  • The money will be applied to the purchase price of the home. This will usually happen if all goes well and the transaction results in a successful closing
  • The money will be returned to the buyer. This can happen (depending on the terms of the contract) if the buyer is unable to obtain financing within a specified time frame, if the home inspection proves unsatisfactory, or if the seller fails to live up to the terms of the contract (making promised repairs, etc.)
  • The money will be paid to the seller. This will happen if the buyer is the one who fails to act in good faith in complying with the terms of the contract, attempting to back out of the transaction without a valid reason as specified in the contract

This is, of course, a simplified version of how money may be disbursed, as there are always situations where buyer, seller, and agents may disagree as to what constitutes acting in good faith. In such situations, it is best to consult a real estate attorney.

For more information on escrow and Tampa Bay real estate in general, contact the professionals at BrendaFricks.com.