Every once in a while, I have a buyer-client that backs out of a transaction for one reason or another. It could be due to an inspection that found too many issues, financing troubles, or problems with a title report. Let me back up even further though. When a buyer makes an offer, they typically offer a good-faith deposit (called Earnest Money) to the seller. These funds are held by escrow (the neutral 3rd party that handles the closing process for buyer and seller). Generally, the escrow deposit (typically anywhere from 1-3% of the purchase price) is protected by a few reasons to back out (or, contingencies) such as the opportunity to have an inspection, make sure financing gets approved, or title is clean (or “marketable” as we like to say). If a buyer backs out for one of these reasons (and within the agreed-upon timeframes), then earnest money is returned to the buyer, the transaction is canceled, and everyone parts ways (usually peacefully).
It’s unfortunate when a buyer backs out, but real estate can be messy, and it’s one of the reasons we protect a buyer’s earnest money with as many contingencies (reasons to back out) as we can.
Up until now…and currently…escrow has been a pain to get earnest money from because they don’t want to be held liable and need written agreement from both parties to release earnest money (even if we can show them that we don’t need approval from both parties in the contract we wrote). It can be frustrating to a buyer that has placed a significant amount of funds with escrow and needs them returned to move along to place an offer on another home. You can imagine that a disappointed seller isn’t always willing to go out of their way to sign a release of the earnest money.
A new law [House Bill 1730] will control disbursement of residential earnest money deposits when transactions are cancelled, and takes effect on July 24, 2015. It will apply to all real estate brokers, independent escrow companies and title companies. This will help streamline the return of earnest money to buyers.
The purpose of the law is to establish a required procedure applicable to all escrow companies to disburse earnest money when a transaction cancels. Escrow holders will no longer be able to use discretion as to how long they hold funds – the timeline is now prescribed by law.
All funds on deposit on July 24th will be subject to the new procedures – this includes pending transactions.
When a transaction cancels, a DEMAND for payment (by either party) triggers escrow to comply with the new statutory procedures.
NOTICE: Notice must be sent within 15 days of receipt of the demand to parties in the transaction, unless both parties previously agree upon the disbursement.
RESPONSE: Objection to the disbursement, if any, must be received within 20 days.
* If there is no objection, escrow must disburse within 10 days.
* If there is an objection, escrow must commence an inter-pleader action in Superior Court within 60 days. However, both parties can agree upon the disbursement and avoid that delay and expense.
The notice must be both mailed and emailed (if an email address is within the Escrow Holder’s records for that transaction).
The Notice procedure is mandatory, with two exceptions:
1. The parties may agree upon disbursement at any point in the procedure (even after an Objection), allowing the Holder to disburse immediately and terminate the procedures.
2. The escrow holder may commence inter-pleader in lieu of the notice procedure. It may commence the inter-pleader directly even in the absence of an objection.
Here’s to a more streamlined process…
For more information, contact:
Ryan J. Halset
Broker | Realtor | ABR
Boardwalk Real Estate
Seattle Magazine, Five Star Agent – Best in Client Satisfaction