Avoid Mishandling Earnest Money
Mishandling earnest money is an area that often results in license law violations for agents and brokers. Below are five simple things you can do to make sure you’re not making mistakes that could land you in front of the Ohio Real Estate Commission.
- Don’t sign the section on the purchase contract confirming the receipt of earnest money if you don’t have it. This may sound obvious, but violations for misrepresentation have been found when trusting agents sign this section based upon the buyer’s promise to get the agent the check the next day and then never does. To avoid disciplinary action, a good rule of thumb is that if you don’t have the check in your actual possession, don’t sign anything saying you do. Instead, indicate it will be collected upon acceptance or at a later date.
- Get the earnest money deposited ASAP. For agents this means that you need to get the check to your broker/manager (or the person at the brokerage responsible for depositing it) in a timely manner, which is usually considered to be within 24-72 hours of acceptance of the offer. And remember, the fact that the contract has contingencies doesn’t matter. If the contract says the earnest money is to be deposited upon acceptance, it needs to be deposited in a timely manner after acceptance, not after the contingencies are removed or satisfied.
- Make a good faith effort to collect any earnest money that the buyer is required to make and promptly notify the listing agent/ seller if you don’t receive it. Sometimes under the terms of the purchase contract the buyer will be required to provide a deposit after the contract is accepted or after a certain event occurs. As a buyer’s agent, it is important to document in your file your attempt to collect the earnest money from your client. Unfortunately, a buyer’s promise to bring it to the office the next day can sometimes can turns into several days. When this occurs it may be a signal that the buyer may not perform the terms of the contract. For this reason, the buyer’s agent needs to communicate the failed attempt to collect the earnest money to the listing agent in a timely manner and the listing agent needs to notify the seller immediately.
- Notify the listing agent and seller if the buyer’s earnest money check bounces. Like the failure of the buyer to make a required deposit, the fact that the buyer’s check was returned for insufficient funds is usually not a good sign. Therefore this must be communicated to the listing agent in a timely manner and the listing agent needs to let the seller know that this has occurred.
- If a purchase contract fails to close for any reason, don’t remit the earnest money to either the buyer or seller without the written consent of both parties or a court order directing disbursal. This is true even if financing was denied, the property failed to pass inspection or any other contingency isn’t met. The license law is clear on this and returning an earnest money deposit without the necessary written consent or a court order is a sure way to be disciplined by the Ohio Real Estate Commission.