Rules of the Game: Closing Attorney Holding the Earnest Money

Most of the time, Buyer deposits are held by the Selling Agent’s Broker.  At RMAA, we have clear procedures in place to track the funds.  We follow the money and let you know if the money isn’t forthcoming.

But what if the parties have agreed that the closing attorney should hold the money?  GAR Forms 510 and 511 recite the procedures, but things can go astray.

Consider the following hypothetical:

You are the Listing Agent. A “Closing Attorney Act as Earnest Money Holder”  (GAR F510) has been included in the Purchase and Sale Agreement, so you assume the earnest money is safely in the closing attorney’s account. You assume the closing attorney has agreed to hold the funds, but you have not received a signed Escrow Agreement (GAR F511) back from the closing attorney.  And it has slipped your mind to check on it.   But the Buyer’s agent did not deliver the purchase agreement or the Escrow Agreement to the attorney.  The attorney has received the funds by wire, but has no name or address for it.  The deal is falling apart and the seller expects the wired funds to be forfeited.  Or worse, no contract and no funds were delivered to the closing attorney.  Oops.

These are the rules of the game:

1. The Buyer’s agent must deliver the fully executed PSA  and Escrow Agreement (F511) to the attorney within 2 days of the binding date.
   
2. The Closing Attorney has to agree to hold the funds within 3 days, countersign the Escrow Agreement (F511) and return it to the agents.  If the attorney never got the contract, there is nothing to agree to or deliver.  
   
3. The Buyer (or the Buyer’s agent) is responsible for sending all earnest money to the Closing Attorney by wire transfer and immediately notify Seller when it has been done.
   
4. If the Closing Attorney named as Holder has not become Holder either because the Closing Attorney rejects being the Holder, fails to timely become Holder or becomes Holder but later resigns, then the Alternate Holder,  named in the GAR F510  (who must be a broker in this transaction) automatically becomes the Holder and the funds can be transferred to the alternate Holder.  
   

Back to the hypothetical.

1. No F511 was signed, so the Closing Attorney has not agreed to be the Holder. 
   
2. The funds were wired, but the Closing Attorney rejected the wire because there was no agreement.  (Or no funds were wired at all.)
   
3. The deal is falling apart.  There are no contingencies.  The Seller is expecting the earnest money to be forfeited to him.  
   
4. But there are no funds.  
   
5. The Buyer’s agent didn’t do his job, but doesn’t look so bad to the Buyer because the Buyer didn’t lose his money.
   
6. The Listing Agent has have to answer to his client because he didn’t check to see if the Buyer’s agent did his job and that the funds were held.
   
7. Does the Seller sue for the earnest money that should have been in escrow?  Who does the Seller sue? His agent or the Buyer’ agent?  Or both?  Yikes.
   

Moral of the story:  If you are the Buyer’s agent, deliver the fully executed agreement along with the Escrow Agreement ASAP after the Binding Date.  The Rule is 2 days.  If you are either the Listing Broker or the Buyer’s Broker, make sure you have received the Escrow Agreement back from the Closing Attorney no later than 5 days after Binding Date.