DEAR BENNY: I am selling my house and received two offers on the same day: The first offer came in first thing in the morning, and I made a counteroffer. Several hours later there was another offer. My agent informed both buyers’ agents of the competing offers and shortly after was informed by buyer’s agent No. 1 that his clients had accepted the counteroffer. I rejected offer No. 2, as required, and started packing.
Four days later, my agent informed me the buyers changed their minds and (here’s the kicker) the buyer’s agent returned the $20,000 earnest money deposit (EMD) to the buyers. It was at this point that I learned the out-of-state buyers did not have their checkbook with them while they were in town.
They had made the initial offer and FedEx’d the EMD to their agent two days after accepting the counteroffer. For the two days following receipt of the EMD, the buyer’s agent told my agent he would deliver the check and contract to her office but failed to do so.
Of course, I filed a breach-of-contract lawsuit against the buyers, who now claim they never signed the counteroffer, and their agent claims he never received the executed counteroffer, stating the FedEx envelope contained only their $20,000 EMD payable to the listing agent’s firm.
So while your suggestion to “demand an earnest money deposit that’s too big to forfeit” is a great idea, I would add, “Make sure the escrow agent has possession of it.” It’s the only way I will accept an offer in the future. --Chris
DEAR CHRIS: Perhaps I don’t really understand the facts. However, if the agent received a check for the earnest money deposit and if there was a real estate contract (or at least you believed there was one), the agent did not have the right to return the money to the potential buyer.
This is an area that many people do not understand. When money is given to a third party (often a real estate agent or broker) to hold pending something happening -- such as buying a house -- that is called “escrow.” (NOTE: In the eastern part of the U.S., we call house closings “settlements”; in many Western states, they are called “escrow settlements.” I am discussing escrows only in terms of the EMD.)
When someone holds money in escrow, that creates a fiduciary relationship between two parties: the party who put up the money and the party to whom it may ultimately go. Accordingly, once money is held in escrow, it cannot be unilaterally released just because one person says, “Give me the money, there is no contract,” or “Give me the money because the buyer breached the contract.”
There are only two ways that escrow funds can be released: (1) upon receiving a written document signed by both parties authorizing how the moneys are to be distributed, or (2) a court order.
I cannot give you a legal opinion because I do not know all of the facts, but your attorney should be able to assist.
DEAR BENNY: I own five rental homes that are managed by a management company. On my monthly statement the company listed a forfeited security deposit as “Rents Received” and charged me a 10 percent management fee. I believe that his money is not rent, so I should not be charged a 10 percent management fee on it.
The management fee is clearly spelled out in two places in my management agreement: “ ‘X’ Real Estate and Property Management Services Inc. will charge 10 percent of the gross collected rents on a monthly basis.”
Are you familiar with this detail in such management agreements? If so, is this legal and/or typical? Rules regarding security deposits stipulate they be used either for repairs and cleaning charges, or returned to the tenant. In this particular case, the $900 security deposit was not returned to the tenant because of the condition he left the home.
After the tenant left, I paid $760 for clean-up and repairs, $175 for carpet cleaning, and $165 to have the locks changed. The management company charged me a $90 management fee and called the security deposit “rents received.” --Ron
DEAR RON: No, I have never seen such a charge for security deposits. As you correctly state, the security deposit is not rent. It is used to ensure the landlord that at the end of the tenancy, the premises will be in the same condition (wear and tear excepted) as it was when first rented. If there are problems, the security deposit is used to make the corrections.
In fact, many leases specifically state that the security deposit cannot be used for the last month’s rent (although many tenants try to do this anyway).
I would first review your state landlord-tenant laws. Many states have laws regulating how much the security deposit can be, and this may be of assistance.
Second, I would discuss your concerns with the management company. Tell them that you are not happy with their charges, and if they do not stop you will find another manager. I seriously doubt that they will want to lose your business.
But, make sure that your management agreement specifically spells out that they cannot charge you for security deposits.
DEAR BENNY: Regarding whether to give houses to heirs as gifts or let heirs inherit them, you have expressed your preference numerous times. In general, I agree with you to let heirs inherit houses so that they get a stepped-up cost basis and hence won’t pay capital gains tax.
However, for those who have large estates or even moderate estates, it’s better for them to give houses to heirs when the property value is low. That’s because when heirs inherit houses, if the property value increases a lot, the chance of estate value exceeding the exemption amount becomes very high and hence they will have to pay estate tax. And the estate tax rate is forbiddingly much higher than that of capital gains tax. --Yixin
DEAR YIXIN: Thank you for your helpful comment.
Let me explain: If you gift your property to someone, your tax basis becomes their basis. Unless they live in the property long enough to take advantage of the up to $250,000 (or $500,000) gain exclusion, when they sell they will have to pay capital gains tax on their profit.
However, if they inherit the property, because of what is called the “stepped up” basis, their basis is the value of the property on the date of death. Thus, if they sell immediately, they may have little or no gain.
But your point is well taken: Before you decide to gift your property, have your tax and financial advisers run the numbers. While no one can predict what Congress will do with estate and inheritance taxes in the future, the advisers can at least give you ballpark figures so that you can make an educated judgment about whether to gift your property to your children or let them inherit it when you die.
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 firstname.lastname@example.org.