Who gets the interest on earnest money?
Craig on 06 5, 2007
They say a blog serves many purposes. Well, I’m hoping one purpose is to educate the blogger…
With high values properties, it is common for a buyer to put up a significant amount of earnest money. State law allows a seller to keep up to 5% of the purchase price in earnest money in the event that the buyer breaches the contract and wrongfully fails to complete the purchase. Thus, on a sale price of $1 million, the seller is allowed to retain up to $50k in earnest money. Accordingly, earnest money deposits in signficant amounts are not uncommon.
But what happens to that money after it is deposited by the buyer but before closing? Given that there are now savings accounts that pay 5%, an earnest money deposit in excess of $50k can earn more than $200 per month in interest. Not a ton of money, but enough to sustain a latte habit…
Per state regulations, if earnest money greater than $10k is deposited with the buyer’s broker, the money must be deposited in an interest bearing account for the benefit of the buyer, unless the buyer consents in writing to deposit the money in the broker’s pooled account. In the pooled account, the interest is paid into the Washington housing trust fund, which assists in providing housing to low income families.
However, most earnest money funds are deposited with escrow, as many brokers have decided to forego the administrative headaches associated with a trust account. What happens to that money when it sits in escrow? Does the escrow agent have a legal obligation to place it in an interest bearing account for the benefit of the buyer? How about an ethical obligation to do so? Or, if there is no applicable law (I have not found any, although I have not exactly researched the issue in depth), can escrow reap the benefit of the interest? What say you, astute and knowledgable RCG community members (and particularly you escrow providers)?
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20 Responses to “Who gets the interest on earnest money?”
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Under our standard contracts, the options are for the buyer to receive the interest, or the Housing Fund Account with interest to the State Treasurer. Not the escrow holder.
For the buyer to receive the interest, the buyer must deliver a completed W-9 BEFORE the check is required to be deposited. If the W-9 is not in place within the required timeframe, the default interest receiver is the State Treasurer via the Housing Fund Account.
A good local example would be the 5% deposit required by a builder at time of contract on a pre-construction high end condo downtown, due to be completed in 2009. Sale price $1.6 million. 5% held for two years until close of escrow. Interest at 3.5% after administrative costs is $5,600.
If the Earnest Money must be deposited within 48 hours of acceptance, and the W-9 is not completed until the 4th day, the two years of interest goes to the State Treasurer. But most new construction sites collecting pre-construction deposits, include the W-9 with the initial offer, to protect the buyer’s interest.
Actually, Ardell, the NWMLS form contract (Form 21) makes no mention of interest if the earnest money is held by escrow. Line 7 of page 2 of that form notes that “If the Earnest Money is held by Selling Broker…” and goes on at length as to how the money must be handled by the broker (lines 8-16), essentially restating the applible regulations. If you review that paragraph (paragraph b.) closely you’ll see there is no instruction to escrow or any other indication as to interest on the earnest money held by escrow. Your comment relates entirely to money held by the broker.
Anybody know about money held by escrow?
Will be interesting to see if Escrow and Selling Broker are interchangeable there or not. If we don’t get an answer from an escrow person soon, I’ll make a couple of calls.
I would expect them to be interchangeable, as I view escrow to be holding FOR the selling broker (loose translation) and subject to the same terms and conditions in the contract.
I agree that with so many using escrow as the Earnest Money holder, the contract needs some updating to the form’s section b. to clarify. I would expect escrow to give the buyer the interest if at all possible, and not try to profit from the Earnest Money holdings, particularly if there is a long holding period and a large deposit.
There is no legal basis for assuming that Escrow and Selling Broker are “interchangeable.” I too would expect escrow to pay interest to the buyer, but the earlier discussion re: loan originators “harvesting” seller paid closing costs opened my eyes quite a bit…
Escrow, help us out here (and don’t make Ardell “make a couple of calls” — you know she’s connected and you might not like the results…).
I already emailed a couple and asked them to respond here directly. It’s first week of the month. We should be able to get a couple of responses by tomorrow.
I’ll keep emailing. I don’t want to interpret their answers. Would rather see them posted direct to the site.
WAC 208-680E-011 is the part of escrow law that deals with this issue. Paragraph 1A says:
“Interest-bearing trust bank accounts or dividend earning investment accounts containing funds pertaining to an individual escrow transaction or escrow collection account may be established by the agent if directed by written agreement signed by the principals to the transaction and specifying the manner of distribution of accumulated interest to the parties to the transaction.”
We will deposit earnest money into an individual interest-bearing account only if we receive written instructions from the principals. Typically, we don’t receive instructions to establish a separate account unless there is an extended closing, not the average 30-day closing.
If we do not receive instructions to establish a separate account, the money goes into our pooled IOLTA account. Escrow companies are not allowed to keep interest on the trust account. We can, however, utilize some of the interest for approved trust account related expenses. A portion of the interest goes to the Legal Foundation of Washington, and the bank keeps the rest.
Thanks Lynlee,
I don’t get “the bank keeps the rest” part.
The interest that accrues on the trust account does not go into the escrow company’s pocket. Interest on our trust account is several thousand dollars each month. A small portion goes to the Legal Foundation of WA, we can “spend” a little of it (for trust account expenses), but the unused portion is absorbed by the bank.
Lynlee:
You cite Paragraph 1(a) of the relevant WAC, which is one of the three exceptions to the general rule as stated in Paragraph 1. However, Paragraph 1(c ) is in fact the relevant paragraph. Paragraph 1 indicates that trust bank accounts shall be noninterest bearing, with three exceptions. Subparagraph (a), which you quote, is one such exception. Subparagraph (c), another exception, indicates as follows:
“[Trust accounts shall be noninterest bearing, except] Interest-bearing trust bank accounts containing funds pertaining to transactions in which a limited practice officer has prepared documents under authorization set forth in APR (Admission to Practice Rule) 12(h).”
As you know, escrow officers are limited practice officers that prepare documents and who are governed by APR 12. APR 12(h) indicates that escrow officers shall comply with APR 12.1 in regards to the manner in which they maintain funds received incidental to the closing of real property transactions. So, escrow officers are governed by APR 12.1.
APR 12.1 addresses the issue of when earnest money funds should bear interest for the benefit of a party. Specifically, per APR 12.1(c), earnest money funds should be deposited either into (1) a pooled interest bearing account, where the interest is paid to the Legal Foundation of WA (which assists in providing legal services to low income persons), OR (2) into any one of the following accounts: (a) a separate interest bearing account if directed by the parties in writing, including instructions as to the specific distribution of the accumulated interest to the parties; (b) a separate interest bearing account that bears interest on behalf of a particular party; or (c) a pooled interest bearing account if the account segregates the interest to the various parties who are entitled to it. In determining whether to deposit the funds into the account identified in (1) or one of the accounts identified in (2), escrow should consider the costs and benefits of setting up a separate interest bearing trust account (i.e. the costs of setting up and maintaining the account vs. the amount of money and the duration that it will be held). If the client will clearly benefit from a separate interest bearing account, then escrow must open such an account for those funds.
APR 12.1 is not exactly a model of clarity. Nonetheless, I am confident that, in the typical transaction such as the one identified by Ardell above, escrow has an obligation to open the account identified in (2)(b) on behalf of the buyer. The account identified in (2)(a) (which essentially mirrors the language of the WAC that you provided) does not apply, because the funds belong to the buyer until released to the seller (whether as a “nonrefundable deposit” or because of buyer default) or until closing. Until then, I don’t think there is any dispute that the funds belong to the buyer. Therefore, there is no need for written agreement among the parties in regards to distribution of the accumulated interest.
Per the terms of the rule, escrow has this obligation regardless of whether or not escrow receives written instructions to do so. In Ardell’s example, the buyer is entitled to have those funds earn interest on the buyer’s behalf given that the benefits of such an account (thousands of dollars in interest while the transaction is pending) outweigh the costs of setting up the account.
I have a case right now very similar to Ardell’s example. I have confirmed that escrow placed the funds into its shared trust account where interest in paid to the Legal Foundation of WA. I am in the process of consulting with my clients to determine whether or not it is worth seeking the interest which they should have earned on those funds had they been appropriately placed in a separate interest bearing account for their benefit.
Craig, what is the “the Legal Foundation of WA? It almost sounds like, the answer to your question about who get’s the interest is a group of attorneys?
Rhonda — it’s the name of a monthly meeting at various downtown drinking establishments for attorneys only…
Actually, as I noted in my LENGTHY comment, it funds legal services for low income people: Legal Foundation of WA
Ooops — I noted the true nature of the Legal Foundation of WA in my initial lengthy comment, which I managed to delete before posting (another reason why blogging is so time consuming
)
Back in my escrow days at the title company…I always suspected your first answer! But, if it’s providing funds for low income people, are attorney’s paid from the foundation or do they work pro bono for the low income people?
Honestly, I have no idea. Check out the web page for more info.
I know it’s a different state but there’s some interesting comparisons on ED’s posts here http://title-opoly.squarespace.com/title-opoly/2007/5/24/one-last-time-the-dirty-little-secret.html and on AR.
Sorry if you consider this spam just delete the comment. I thought it might add to your great post.
Thanks Keith,
I think the more relevant article is this one, which is referenced, but not linked to, in the link above:
http://activerain.com/blogsview/104542/The-Dirty-Little-Secret
Keith — that is so incredibly NOT spam — thanks for the comment. Actually, the issues raised by both your link and Ardell’s should not be an issue here in WA. The same rule (APR 12.1, discussed at length in comment #9) applies to funds held by escrow for the loan payoff, as the rule regulates “ALL funds received by the closing firm incidental to the closing of the transaction.” (APR 12.1(b) (emphasis added) Therefore, escrow has an obligation to, at a minimum, place funds in the pooled interest-bearing account that benefits the Legal Foundation of WA (aka an IOLTA account). If the funds are in a sufficient amount that will be held for an extended period (like earnest money, but almost certainly not loan payoff funds), then escrow has an obligation to place the funds in a separate interest bearing account for the benefit of the owner of the funds.
MY DAUGHTER HAD A CONTRACT ON HER HOME THE BUYER PUT DOWN EARNEST MONEY AND GUARANTEED THEY COULD SECURE A LOAN IN 45DAYS, THEY THEN ASKED FOR AN EXTENSION, MEANWHILE THEY HAVE SPENT MOST OF THEIR HOUSEPAYMENT ON INSPECTIONS AND MINOR CODE UPGRADES. NO FURTHER CONTACT WITH THE REALESTATE AGENT OR THE LAWYER…THE EXTENTION HAS COME AND GONE. WHO GETS THE EARNEST MONEY?
Kim — as an initial matter, you should hit the “Caps Lock” button and use the lower case. In the blog/email world, caps are the equivalent of shouting — and who likes to be shouted at?
I’m never comfortable giving legal advice via the internet, particularly where I have no idea as to the state where the property is located. Most contracts have an attorney’s fees provision. I suggest you contact an attorney in your area for a preliminary consultation. If the buyer breached the contract without legal excuse, it may very well be worth hiring an attorney in order to get the earnest money (particularly if it is a large sum).
Sounds like it could be another NY person with no “time is of the essence” clause. I say that because he mentioned “agent or the lawyer” and that usually means NY or North Jersey and no time is of the essence until invoked. But that’s a guess.
Kim,
If the finance contingency holds until closing, which it often does on the East Coast vs. West Coast, and the buyer can’t get a mortgage, you may not get the Earnest Money. The buyer us often protected if he can’t get a mortgage. It depends on the contract, so we can’t answer. You need to have someone where you live look at your contract, like YOUR agent and lawyer, not their agent and lawyer.