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Hot Topic: Handling Disputed Earnest Money Deposits According to NC Law
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Handling Disputed Earnest Money Deposits According to NC Law

Written By:
Bill Gallagher, Owner/President
Superior School of Real Estate
bgallagher@superiorschoolnc.com

As I teach across the state of North Carolina, I continue to hear remarks from licensees about the issues regarding the proper handling of earnest money deposits according to NC Law. On the NCAR/NCBA Offer To Purchase and Contract 7/2007, the “Note” in provision 4(a) has increased in size and has been updated.

NOTE: In the event of a dispute between Seller and Buyer over the return or forfeiture of earnest money held in escrow, a licensed real estate broker ("Broker") is required by state law (and Escrow Agent, if not a Broker, hereby agrees) to retain said earnest money in the Escrow Agent’s trust or escrow account until Escrow Agent has obtained a written release from the parties consenting to its disposition or until disbursement is ordered by a court of competent jurisdiction. Alternatively, if a Broker is holding the Earnest Money, the Broker may deposit the disputed monies with the appropriate clerk of court in accordance with the provisions of N.C.G.S. §93A-12.

The note from provision 4(a) states what happens when earnest money is in dispute and it also references the NC General Statute 93A-12 which allows the money to be deposited with the appropriate clerk of court in the county where the property is located after the parties receive a 90 day notice. Also, the revised note states an "Escrow Agent" (if not a Broker) is still required to follow the same laws and procedures which now includes law firms who are allowed to hold earnest money deposits if the parties agree.

The main concern of licensees is that sellers disagree on the return of the earnest money deposit even though a condition or contingency is clearly stated in the Offer To Purchase and Contract and that the stated condition or contingency is not performed by the party after using their best efforts. Licensees must remember that even though it may be readily apparent from the facts and contract language who is entitled to the earnest money deposit , licensees must understand that anytime a party disputes the release of trust monies (other than residential/vacation tenant security deposits), the licensee must continue to hold those disputed funds in the trust account pending written agreement of the parties or an order from a court of competent jurisdiction as required by Commission Rule A.0107(g).

Example #1: Buyer used their best efforts to obtain financing with three different lenders. All three lenders did not give the buyer loan approval. The buyers want their earnest money returned because they were not able to obtain financing. The sellers state that they are unwilling to release the earnest money since their house was "off the market" for several weeks. Escrow agent must continue to hold the money as per the “Note” in Provision 4(a).

Example #2: Alternative One, in the NCAR Offer To Purchase and Contract, was agreed to by all parties. After the buyer completed inspections and submitted a repair list of items stated in Alternative One to the seller for negotiation, the agent responded that the seller would not make any repairs to the property and the buyer could "take it or leave it". The buyer decided to terminate the contract, as stated in Alternative One, and requested the return of the earnest money deposit. The agent's respnse was the seller is not willing for the earnest money deposit to be returned because the seller felt the repairs required were minor and insignificant. Escrow agent must continue to hold the money as per the "Note" in Provision 4(a).

Example #3: The contract states that the property is to appraise for the sales price. The lender's appraiser completes the appraisal at $5000 less than sales price. In addition to the contract stating an appraisal contingency, the lender will not give the buyer a loan because of the appraisal. The buyers request the return of the earnest money. The seller states that the appraiser was not competent to appraise the property and will not release the earnest money. Escrow agent must continue to hold the money as per the "Note" in Provision 4(a).

After reading these examples, you realize that the real estate licensee is "in the middle" of the discussions between the buyer and seller; moreover, a licensee "is prohibited from making an independent decision in the matter, even if the broker considers the contract's disposition provisions to be clear" (NC Real Estate Manual, 2006-2007 Edition, By Hetrick, Outlaw, Moylan).

Our next Hot Topic E-Mail will discuss:

  1. If the buyer makes an oral or written termination of a sales contract, can the seller put their property "back on the market" and close with another party even though the earnest money deposit is in dispute with the first potential buyer?
  2. Is an earnest money deposit required in order for an offer to purchase and contract to be valid and enforceable in North Carolina?
  3. What have other states done to relieve or avoid the earnest money deposit dispute conflict between buyers and sellers?

I welcome your comments, ideas, and suggestions regarding this e-mail and future e-mail topics. Please e-mail me at bgallagher@superiorschoolnc.com I look forward to seeing you in class very soon.






 

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