Chapter: A buyer makes an offer on a property in Maryland and includes an earnest money deposit. Where is this deposit typically held? (EN)

Chapter: A buyer makes an offer on a property in Maryland and includes an earnest money deposit. Where is this deposit typically held? (EN)

Earnest Money Deposit: Definition and Purpose

• The Earnest Money Deposit (EMD), also known as a good faith deposit, represents the buyer’s sincere intention to purchase a property. It serves as a form of security for the seller, demonstrating that the buyer is serious about fulfilling the obligations outlined in the purchase agreement.
• The amount of the EMD is typically a percentage of the purchase price, though this is negotiable and can vary based on market conditions and other factors.
• Purpose:
  • Indicates the buyer’s commitment to the transaction.
  • Provides the seller with partial compensation if the buyer breaches the contract without a valid contingency.
  • The EMD is credited towards the buyer’s closing costs and down payment at settlement.

Acceptable Forms of Earnest Money

• Typically, the EMD is tendered in one of the following forms:
  • Personal Check: A check drawn on the buyer’s personal bank account.
  • Cashier’s Check: A check guaranteed by a bank, offering greater security than a personal check.
  • Wire Transfer: An electronic transfer of funds directly from the buyer’s account.
  • Promissory Note (Rare): A written promise to pay the EMD amount at a specific future date. This is less common and requires explicit agreement between the parties.

Legal Framework in Maryland

• Maryland real estate law governs the handling and disposition of earnest money deposits.
• Maryland Real Estate Brokers Act: This act outlines the regulations for licensed real estate brokers and their responsibilities regarding escrow accounts and trust funds, which are directly relevant to EMD management.
• Maryland Contract Law: The specifics of the purchase agreement dictate the conditions under which the EMD can be forfeited or returned.
• Escrow Law: Maryland has specific laws governing escrow accounts, ensuring the proper handling and disbursement of funds held in trust.

Typical Custodians of Earnest Money in Maryland

The most common custodians of EMDs in Maryland are:

1. Real Estate Brokerage (Listing Broker or Selling Broker):

   • Prevalence: The listing broker (representing the seller) or the selling broker (representing the buyer, if applicable) most frequently holds the EMD. This is the industry standard practice in Maryland.
   • Escrow Account: The brokerage is legally required to deposit the EMD into a federally insured, non-interest-bearing escrow account (also known as a trust account).
   • Escrow Account Management: The brokerage’s escrow account is subject to strict regulations to ensure proper accounting and prevent commingling of funds (mixing client funds with the brokerage’s own operating funds).
   • Disbursement: The brokerage can only disburse the EMD according to the terms of the purchase agreement or with written authorization from both the buyer and seller.

2. Title Company (Escrow Agent):

   • Occurrence: In some transactions, the title company acting as the escrow agent will hold the EMD.
   • Escrow Agreement: A separate escrow agreement will often be executed outlining the duties and responsibilities of the title company in holding and disbursing the funds.
   • Neutral Third Party: The title company, as a neutral third party, provides an added layer of security and impartiality in managing the EMD.

3. Attorney (Rare):

   • Occurrence: Less common, but in certain circumstances (e.g., transactions involving sophisticated or complex legal issues), an attorney representing one of the parties may hold the EMD in their client trust account.
   • Client Trust Account: Similar to a brokerage’s escrow account, an attorney’s client trust account is subject to strict regulatory oversight.
   • Attorney as Fiduciary: The attorney acts as a fiduciary, obligated to act in the best interests of their client and in accordance with ethical rules.

Mathematical Representation of Earnest Money Impact

The earnest money deposit can be thought of as contributing to the overall financing of the purchase:

• Let:

  • P = Purchase Price of the Property
  • E = Earnest Money Deposit
  • D = Down Payment (excluding the EMD)
  • L = Loan Amount

• Then: P = E + D + L

• The buyer’s total cash outlay at closing (excluding closing costs C) is: E + D + C

Example Scenario and Brokerage Procedures

Consider a buyer, Alice, making an offer of $400,000 on a property in Maryland. She includes an EMD of $10,000.

• Scenario 1: Listing Broker Holds EMD:

  • The listing broker, XYZ Realty, receives Alice’s EMD check.
  • XYZ Realty deposits the $10,000 into its federally insured escrow account within a reasonable timeframe (typically within 5 business days of acceptance of the offer).
  • The funds remain in the escrow account until settlement, or until disbursed according to the terms of the purchase agreement (e.g., due to termination of the contract under a valid contingency).
  • At settlement, the $10,000 is credited towards Alice’s down payment or closing costs.

• Scenario 2: Title Company Holds EMD:

  • Alice’s EMD check is made payable to the designated title company, ABC Title.
  • ABC Title deposits the check into its escrow account.
  • ABC Title disburses the funds at settlement to be credited towards Alice’s purchase.

Dispute Resolution

• If a dispute arises regarding the EMD (e.g., disagreement over contract termination and entitlement to the funds), the parties may attempt to resolve the matter through:
  • Mediation: A neutral third party helps facilitate a resolution.
  • Arbitration: A neutral arbitrator renders a binding decision.
  • Litigation: Filing a lawsuit in court to determine the rightful owner of the EMD.

Breach of Contract and Forfeiture

• If the buyer breaches the purchase agreement without a valid contingency (e.g., financing falls through, inspection reveals unacceptable issues), the seller may be entitled to the EMD as liquidated damages.
• The purchase agreement should clearly outline the circumstances under which the EMD can be forfeited.

Important Considerations

• Review the Purchase Agreement: Carefully review the purchase agreement to understand the terms and conditions related to the EMD, including the designated holder, disbursement procedures, and forfeiture clauses.
• Seek Legal Advice: If any concerns or uncertainties arise, consult with a qualified real estate attorney.
• Documentation: Maintain meticulous records of all EMD-related documents, including checks, wire transfer confirmations, and escrow agreements.