|It is usually necessary to put up
an earnest money deposit when buying real estate. An independent
escrow agent normally holds the deposit, although sometimes
the broker or an attorney holds it for one of the parties.
The earnest money deposit serves two purposes: (1) it shows
that the buyer is serious, and (2) it can be forfeited to
the seller if the buyer fails to perform. An independent escrow
agent usually holds the deposit, so that it can be automatically
paid over to the seller if the buyer defaults, or applied
against the purchase price if the sale closes.
In a hot market, the seller will sometimes ask to have the
earnest money deposit released to him after the contingencies
have been satisfied. The seller likes this because it means
he will not have any trouble gaining possession of the deposit
if the buyer defaults.
If the buyer objects to this idea, the seller may offer to
put a signed deed in escrow, pointing out that he has then
done everything necessary to close. He will say that the only
thing left to be done is for the buyer to come up with the
rest of the money.
This sounds reasonable. What could go wrong?
The answer is "plenty."
In most commercial real estate transactions, the seller has
to do more than put a deed in escrow. If the seller is a corporation,
trust, or limited liability company, copies of organizational
documents may have to be produced and be certified as effective
and complete. Resolutions, certificates of good standing,
and other items may be required. If, for some reason, the
seller cannot produce the necessary items, the closing may
In addition, surprises can and do occur. Perhaps a tax lien
or mechanics’ and materialmen’s lien attaches
to the property just prior to closing. Perhaps an amendment
to the title commitment discloses an unknown title defect.
Maybe a lawsuit is filed affecting the property, or maybe
the seller dies prior to the closing. It is also possible
that the property could be damaged or destroyed prior to close
of escrow. If any of these things occur, a closing might be
delayed or become impossible through no fault of the buyer.
If his earnest money has already been released, the buyer
is left in a difficult situation. He must then rely on the
seller to give it back (if he has not yet spent it), which
could require litigation. At the very least, he has severely
weakened his bargaining position and placed himself at risk.
It is a bad idea to allow earnest money to be released prior
to the closing. Avoid it if you can. If the seller will not
budge and you feel that you definitely want to purchase the
property, negotiate the amount down to the smallest amount
possible, and make it clear that the seller has to return
the money if the closing does not occur for any reason other
than your own failure to perform.
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