Escrow Deposits – What’s the magic number?
When a Buyer writes up an offer to purchase real estate, one of the first decisions that they make is how much to put down as an escrow deposit. Oftentimes the Buyer isn’t certain. They may ask their agent what is customary, they may try to choose a percentage of the purchase price, or they may wonder if they can get away with the smallest amount possible. These are all reasonable considerations since the escrow deposit is an open value to be written in by the Buyer.
When choosing that magic number, the Buyer of course wants to select an amount that shows the Seller that the Buyer is serious about their offer, but the Buyer also needs to understand that they are selecting the amount that they are risking as liquidated damages in the event that they breach the contract. Of course no Buyer enters into a contract hoping to breach, but these things do happen and the Buyer needs to understand that is one of the purposes of their escrow deposit. It is also worth noting that the FR/BAR contracts assume that there may be two escrow deposits, so if the Buyer is concerned about how much they have to put down immediately, they do have the option of putting down some escrow funds at the outset of the contract and then putting down the remainder of their deposit at some future time prior to closing. If the Buyer does choose to make their deposit in two increments, it is very important to note that the contract defines a “Deposit” as all deposits paid or agreed to be paid. Consequently, if the Buyer breaches prior to making the second deposit, the Seller may elect to recover from the Buyer the initial deposit paid and the additional deposit to be paid.
On to the Seller side of things. When accepting an offer including an escrow deposit amount, a Seller should understand that the escrow deposit is likely going to be their main source of relief in the event that the Buyer breaches the contract. The amount should be one that would be acceptable to them as what they would retain if the deal does not close due to Buyer’s breach. It is also important for the Seller to understand that if there is a breach, they do not automatically retain this escrow deposit. They may have to go through the dispute resolution process laid out in the contract to make their claim to the deposit.
Last, there are times when a Buyer and Seller may choose to have NO escrow deposit, and some may wonder if they even have a contract? The answer to this is yes. There is no requirement that an escrow deposit exist in order to have a valid and enforceable real estate contract. When Buyer and Seller enter into a real estate contract, the Buyer is promising that they will take on certain obligations, not the least of which is ultimately paying for the property at closing. The Seller is also taking on certain obligations, the largest of course being selling the property at closing. This mutual exchange of obligations creates a legally binding and enforceable contract.
As always, if you have any questions we encourage you to reach out to one of the attorneys at Berlin Patten Ebling, or speak with your local real estate attorney.
Berlin Patten Ebling, PLLC
Article Authored by Jessica Featherstone, Esq., firstname.lastname@example.org
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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