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Seller’s right to earnest money

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POSTED December 31, 2011 1:24 a.m.

DEAR BENNY: Our buyer defaulted on his real estate contract and has decided not to buy our house. He had put up a $20,000 earnest money deposit, which we want. However, our real estate broker is refusing to release those funds. What can we do? --Dylan


DEAR DYLAN: Let me clarify an issue that is often misunderstood. When a buyer gives money to a title attorney, escrow company or real estate broker as the good-faith earnest money deposit pursuant to a real estate contract, this money is held in escrow. And even if the buyer is clearly in default -- which is not always the case -- the escrow agent cannot unilaterally release the funds to the seller. For that matter, even if the buyer is not in default, unless the contract authorizes an immediate release of the escrow funds, the escrow agent cannot give the money back to the buyer.

Escrow is defined as “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.” In practical terms, this means that when an escrow agent holds the earnest money deposit, these moneys cannot be released to anyone unless the parties agree in writing as to its disposition or a court specifically orders how the moneys shall be released.

In your situation, this means that you will have to convince the buyer that he was in default and further persuade him to release the deposit to you. This may not be easy; no one likes to lose money.

You may have to file suit to resolve the issue. You and your attorney should carefully review your sales contract. Why did the buyer decide not to go to settlement? Are there contingencies, such as obtaining financing or having an acceptable appraisal, or a satisfactory home inspection?

Litigation is time consuming, expensive and always uncertain. There may be many legal and factual issues involved in your case. My suggestion: Try to reach an amicable settlement with your buyer. He may have the same concerns about litigation and may be willing to reach a compromise. If so, you both should sign a letter authorizing the escrow agent to disburse the funds according to your agreement.


DEAR BENNY: I own two homes. In my will and my trust, I have assigned a beneficiary for each of the properties. However, I would like for the properties to cede to a nonprofit once the designated beneficiary dies, rather than the properties being successively willed to beneficiaries of their choosing. Is there any means to make this happen? --Jerry


DEAR JERRY: The answer is that the trust can provide that the individual beneficiaries have lifetime interests in the respective property and that upon their deaths, the remainder interest in the properties is to go to the charitable beneficiary.

You, as grantor, must make sure that the properties are titled in the name of the trust (should be a revocable trust if you want to maintain control and have the right to change beneficiaries and terms.)

You should also spell out in the trust what the rights/obligations of the beneficiaries are during their lifetimes, such as to receive income from the property if they rent it, to pay taxes, etc. A trust can specify these terms any way the grantor wants.

If the property is merely deeded to the beneficiary as a life tenant with remainder to the charity, the life tenant would automatically be entitled to income even if he/she was not occupying the property.

But I can provide only general, not legal, advice. Discuss your situation with your attorney.


DEAR BENNY: I am renting the other half of my mother’s duplex and I’m looking for the “term” that is used in the “will” that allows me to stay here if she dies. My mother lives in the other half of the duplex. --Todd


DEAR TODD: There are many “terms,” but let me ask you a question first. If your mother dies, will you inherit the property? I never want children to interfere with their parents’ intentions as to how and where the assets will go on death, but it also makes sense if the children at least know what the parents’ intentions are.

So, if you are the only child -- or your mother plans to give you the entire house -- you don’t need any “term.”

But first, you have to determine how your mother holds title. If it is in her sole name, then her last will and testament will control. If she owns the property with someone, that can be in one of two ways:

(1) Tenants in common -- This means that she owns a percentage of the property (usually one-half) and someone else owns the other percentage. On your mother’s death, her will controls who gets her percentage.

(2) Joint tenants (in some states it includes “with rights of survivorship”) -- Here, when your mother dies, the joint tenant will automatically, by operation of law, become the owner of the property. And even if your mother’s will states that you are to get her property on her death, the will is ineffective; the way that title is held controls.

You should talk with an attorney in your area. Perhaps your mother can give you a “life estate” (is that the term you are seeking?), which means that you can live in the house so long as you live, but on your death it will go to someone else, as instructed in your mother’s will.


DEAR BENNY: I am confused. Sometimes I see that you use the word “mortgage” and sometimes “deed of trust.” Aren’t they really the same? --Kenny


DEAR KENNY: That’s a good question. In effect, they are the same. When you borrow money to buy a house, you sign a promissory note (aka IOU) and a document that gives the lender security so that it can foreclose if you go into default. In many parts of the country it’s called a deed of trust: You deed the house to a trustee selected by the lender who has the power to sell in the event of a default. In some of those states, court authority is required before the sale can take place; in many other deed-of-trust states, no such authority is needed.

In a few states, only mortgages are used. They serve the same function as a deed of trust. However, to my knowledge, all mortgages need court authority before the property can be foreclosed upon.

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