Never give seller control of earnest money

Buyer who got cold feet may be entitled to return of deposit

Benny Kass
Inman News®

DEAR BENNY: What are the obligations of an escrow agent? I signed a real estate sales contract and gave the seller a $10,000 earnest money deposit. He was supposed to escrow those funds until closing. However, I decided not to buy and want my deposit back. I have just learned that he has spent the money. What are my rights? –Pam

DEAR PAM: I don’t want to pick on you, but under no circumstances should a buyer ever give a seller the earnest money deposit. If you do, it may be difficult, if not impossible, to get your money back if you are legally entitled to it.

What do I mean by "legally entitled"? You signed a contract to buy the house. Were there any contingencies such as "contingent on a satisfactory home inspection" or "contingent on obtaining financing"? A contingency means that if you cannot accomplish what the contingency calls for — and you let the seller know about this on a timely basis — you are entitled to a return of your deposit.

So your first question: Why do you believe you are entitled to get your money back? Just because you had what we call "buyer’s remorse" does not in and of itself give you the right to back out of a legally binding real estate sales contract. When you buy a car, in most states you have a three-day cooling off period; unfortunately, there is no such period of grace when you buy a home.

Typically, a buyer puts the earnest money deposit in escrow with a third party, which could be the real estate agent, or the settlement (escrow) company or the buyer’s attorney. That party is called an "escrow agent." And the law is very clear: The escrow agent cannot disburse the funds to anyone unless one of two things happen: (1) both parties sign a statement authorizing the release of the money; or (2) a court of law issues an order as to how the funds will be disbursed.

Pam, you have raised an interesting legal question, and I really don’t know the answer to that: Can the seller be an escrow agent? My opinion is that the seller cannot do this.

That does not mean you are out of luck. If you are legally entitled to a return of your deposit, you can sue the seller for breach of contract. You have to discuss your particular situation with your lawyer to make sure that you have a good case.

So, bottom line: Never give a seller the earnest money deposit.

DEAR BENNY: I have read your columns about time shares that are impossible to get rid of, but I have a slightly different problem. I have parents who own a time share where they are current on the maintenance payments and have every intention of making the maintenance payments as long as they are alive; even though they would like to unload it, that has proven impossible. I fear that I may inherit this time share with this maintenance obligation. Is there a way to separate this from the estate in a way that does not impact the rest of the estate? –Joe

DEAR JOE: When your parents die, the time share will become an asset of the estate, and the estate will need to make the payments. Otherwise, the time-share manager will have three alternatives: (1) he can take the time share back (this rarely happens); (2) he can sue the estate for the balance on the outstanding loan obligation, if there is still a loan; or (3) he can foreclose. And depending on what state your parents’ estate is in, the manager could bring an action for a deficiency if the foreclosure does not bring in sufficient funds to cover the outstanding loan.

You will not have any personal liability to make any more payments, unless you arrange to have the time share transferred to you. That’s your choice. If you are the personal representative (called administrator or executor in some states) and if your parents’ last will and testament permits this, you can sell the time share, if, of course, you can find a buyer. Alternatively, you can disclaim, which means you have opted not to accept that time share.

You should, of course, discuss all of this with your attorney. And make sure that your lawyer has experience in elder law and estate planning.

DEAR BENNY: What would the legal consequences be for heirs of an estate if the owner of a time share in his will specifically left word for the executor to pass the time-share deed back to the property association or company that owns the time-share complex? –Darrell

DEAR DARRELL: Interesting question — and creative thinking. Unfortunately, unless the other party agrees to accept the deed, it won’t work. Otherwise, people would give their underwater houses back to the lender — or to some stranger — and be relieved of all legal and financial obligations.

There is a process called "deed-in-lieu" whereby you can give your house back to your lender instead of (in lieu of) foreclosure, but it takes two to tango. And too many time-share managers don’t know how to dance.

DEAR BENNY: I’ve read some of your columns where a reader was asking about what to do with a time share that he was tired of paying the maintenance fees for. We too had a time share that we actually enjoyed for many years but just wanted out of. Our simple solution? We just called the time-share company, explained that we didn’t use it and couldn’t afford the payments anymore.

After some firm convincing them of those facts, they finally agreed to send us paperwork to sign and get notarized, which turned the ownership of that property back to them, and that was the end of the matter! We did this last summer and never got the bills in the fall that we always got for the maintenance fees and dues. Problem solved, and it didn’t cost us a cent other than the postage! –Doug

DEAR DOUG: You were very fortunate, and perhaps your time share was very valuable and the time-share company knew it could be resold. Obviously, every reader who has a time share and wants out should try your approach first. However, I don’t guarantee success, but it never hurts to try.

DEAR BENNY: I have read your article where a writer asked what the appropriate entity type residential real estate should be held in. He stated that he will likely turn the property into a rental. You suggested that title be held in a limited liability company (LLC).Granted it is a two-bedroom condo, and likely to generate no more than, say, $50,000 in revenue. Therefore, it will likely not generate more than the usual and customary $800 tax that California LLCs are subject to.

However, it could be misleading to readers to be of the opinion that all residential real estate should be held in an LLC. In California, if an LLC generates more than $250,000 in gross revenues, it would be subject to a fee of $900 plus the tax of $800. If the same entity had $5 million or more in gross receipts, then the fee is $11,790.

As your article implicitly states, the hallmark of real estate is leverage and depreciation write-offs, thereby generating losses. The inherent problem with holding property in an LLC in California is that even if there is $5 million in revenues and $5,000,001 in expenses thereby generating a dollar loss, that entity would still pay an LLC fee of $11,790 plus $800 for a total of $12,590.

Your CV states that you practice in Washington, D.C. I don’t know about you, but my California clients wouldn’t like cutting a $12,590 check for an entity that is generating a loss after I advised them to put their property in an LLC. –Stephen

DEAR STEPHEN: Many thanks for writing and clarifying the situation in California. You are correct; I don’t practice law in California. In general, I still believe that putting property in a limited liability company makes good legal and financial sense. However, as I always point out in my column, you have to consult your own financial and legal advisers before taking any steps that involve real estate and especially investment property.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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