Escrow 101: What You Need to Know about Down Payments, Contracts and Closing Costs

January 24, 2013 at 9:40 am Real Estate Law

By Sandor Krauss

Escrow KraussThis article provides a walk through of everything you need to know about escrow – from both the buyer’s side and the seller’s side.  Everything is explained from down payments, contracts and closing costs to buyer’s and seller’s rights and attorney’s and escrow agent’s responsibilities.

Usually after signing the contract, the buyer will be obligated to send a check to the seller’s attorney – referred to as the ‘escrowee’ and who holds the down payment. The check  - referred to as the ‘down payment’ or ‘contract deposit’  - is typically 10% of the purchase price. The down payment will be sent to the seller’s attorney along with the partially signed contract. The seller’s attorney will have the seller complete signing the contract, deposit the down payment check into an escrow account and then return the fully signed contract to the buyer’s attorney. It is important to note that until the fully signed contract is unconditionally delivered to the buyer’s attorney, there is no binding contract between the parties. Once the down payment check is deposited and the fully signed contract is returned to the buyer’s attorney, the escrow provisions of the contract will determine the parties’ rights and the escrow agent’s responsibilities.

Given that the standard contract deposit is 10% of the purchase price, many people are quite apprehensive about putting down this sum of money. One of the most common concerns my clients have when entering a contract is what happens to the down payment and how is it protected.    As a residential purchase may be the largest single transaction in a person’s lifetime, it is very important for buyers to understand what happens to their down payment once the check is tendered and what the contract provides in the event of a dispute.

For the purposes of this article, I will only address what a standard contract provides. That said, attorneys will occasionally expand on the escrow provisions by adding specific language to the riders to the contract of sale.  Typically a contract’s escrow terms will include the following:

 

  • The down payment will be held and disbursed in accordance with the terms of the contract.
  • The deposit will be paid by the escrowee to the seller at closing.
  • The mechanism by which the parties must notify the escrowee of their respective demands as it relates to the down payment if the closing does not occur.
  • In the event of a dispute about the down payment, the escrowee must either hold the down payment in escrow until directed by both parties in writing or hold the down payment until directed by a final, non-appealable judgment order or decree of a court.
  • The method by which the escrowee is permitted to deposit the down payment with the clerk of a court in the County set forth in the contract.
  • That the escrowee shall serve without compensation, is merely acting as a stakeholder, and shall not be liable unless the escrowee acts in bad faith or in willful disregard of the contract.
  • That the Escrowee shall be permitted to represent its own client in any dispute or lawsuit.

It is important to understand that the standard contract states that in the event of a default or misrepresentation by the buyer, the seller’s only recourse is to cancel the contract and retain the down payment as liquidated damages.

Conversely, in the event of a default by seller, the buyer may cancel the contract and receive the down payment back. Another option is for the buyer to sue the seller, forcing the sale of the property based on the theory that property is considered so unique that a money judgment cannot fully compensate the buyer. The buyer may also be entitled to file a “Notice of Pendency” with the County Clerk, which serves as notice to other potential buyers that the buyer in dispute has an equitable claim to the ownership of the property.

Our office has been retained by many aggrieved parties to help resolve escrow disputes. While these cases are costly to litigate and generally don’t wind up in court, when they do, the terms of the contract are paramount.  It is important to make sure that the purchaser comply with all of the contract provisions to be sure that the down payment is protected.

Most transactions result in a successful closing where the goals of both parties are met.  Nevertheless, on the part of the buyer, even if your purchase goes off without a hitch, it’s essential to understand what is happening to your money at all times during the process.

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