Special offer

What happens to your earnest money?

By
Real Estate Agent with Realty ONE Group Advocates 484-237-2055 PA License - AB067198

This is a question I get asked often, especially by first time buyers, but also clients moving from other states. So, I am going to address what happens here in Pennsylvania.

Firstly, the earnest money can be different amounts, sometimes there may be one deposit, other times two deposits. Usually a buyer will give a first deposit of $1,000 followed by a second deposit after completion and negotiation of inspections that will be about 5% of the purchase price, but this amount is negotiable.

My advice to clients is to always make sure your earnest money deposit is being held by a real estate broker and not an attorney or title company. The agreement of sale explicitly details how that deposit is handled by the real estate broker as does Pennsylvania law.

Title companies and attorneys are not held to the same demands. For your own protection work with a real estate broker/company that will escrow your deposits.

What is escrow? Escrow is a specific type of bank account that holds your funds separately to the other monies belonging to the broker/real estate firm. The company needs to account for those to the Pennsylvania Real Estate Commission and there are harsh penalties for instances where those funds are mixed or mingled.

On acceptance of your offer, the earnest money deposit by the terms of the agreement once received needs to be deposited within 24 hours. This does not mean the funds have to be given to the broker in 24 hours unless that is specified in the agreement, only that once received they must be deposited.

These funds, and any additional deposit are held in the escrow account till shortly before settlement or closing. At that time they are transferred to the title company handling the settlement/closing. Usually this is done by a wire so the funds are with the title company in advance of settlement. These funds are all part of your closing costs or deposit. At settlement you may be paying cash or obtaining a mortgage, and will need to transfer funds to complete the purchase to cover any amount not covered by a mortgage.

What happens if the agreement to purchase breaks down?

If the money is deposited in the escrow account, and then for one reason or another the agreement is terminated there are remedies in the agreement to what happens to the deposit. In most cases, where the buyer and seller cannot reach agreement following inspections the funds under the terms of the agreement in Pennsylvania are returned to the buyer.  However, this does require both the buyer and seller to sign a "Release" allowing the broker holding the deposit to return the funds to the buyer. Most contingencies in the Agreement of Sale are handled in the same way. 

If a buyer has somehow annoyed a seller they may decide to not sign the release, and in that case the funds cannot be released to either party. Many sellers think that by not signing they will be given the deposit. This is not the case. So, it is important to realize funds may need to be held until the issue can be resolved by court order, arbitration or mediation or a certain amount of time has passed as written in the agreement of sale.

If you are buying or selling in The Main Line or Chester County contact Nick Vandekar, Selling The Main Line and Chester County with Long & Foster Real Estate Inc., office 610-225-7400, cell or text 610-203-4543, or email Nick@VandekarTeam.com. Our company holds escrow for sellers and buyers when required.

 

Posted by

 

Nick Vandekar
Nick is a Tredyffrin Easttown Residential and Commercial REALTOR selling The Main Line, Chester, Delaware and Montgomery Counties.

Giving you the confidence to make
the right decisions.

225 W Uwchlan Ave
Downingtown , PA 19335
Office 484-237-2055
SellingTheMainLine.com
Mobile: (610) 203-4543 [call or text me]
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If you are buying or selling on or around
Tredyffrin Easttown or along the Main Line, 
I can help you, contact me.

Comments(19)

Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Nick, good to explain what happens in PA!   It is definitely different here in Co.   Interesting to see how things in done elsewhere.

Jan 24, 2023 01:39 PM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good evening Nick,

Good to explain how earnest money is deposited and the amounts in PA. Its quite different in Texas. 1% is deposited in the Title Companies secure bank account within 48 hours of an executed contract (all parities initialed and signed and contract dated). Our Broker DOES NOT take the earnest money. It just goes to show you how different states operate and your post is valuable information if you are buying in PA! Well done.

Jan 24, 2023 03:54 PM
Lawrence "Larry" & Sheila Agranoff. Cell: 631-805-4400
The Top Team @ Charles Rutenberg Realty 255 Executive Dr, Plainview NY 11803 - Plainview, NY
Long Island Condo and Home Specialists

Interesting to read how different this is in your area Nick. Here on Long Island, after there is an acceptable offer, the home inspection takes place. Then the down payment goes directly to the seller's attorney to hold until closing.

Jan 25, 2023 04:15 AM
Brian England
Ambrose Realty Management LLC - Gilbert, AZ
MBA, GRI, REALTOR® Real Estate in East Valley AZ

We always have to have a good response ready for that question since it definitely comes up with new buyers.

Jan 25, 2023 04:37 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Hi Nick... your advice to make sure the brokerage holds earnest money would not fly here in Charlotte region... increasingly, brokerages do not hold earnest money or avoid it at all costs. Ours now generally just go to the buyer's settlement attorney.

Jan 25, 2023 04:42 AM
Nick Vandekar, 610-203-4543
Realty ONE Group Advocates 484-237-2055 - Downingtown, PA
Selling the Main Line & Chester County

Joan Cox I thought this would be a good subject as first time buyers always seem to think it is lost money and it does seem different in each state.

Dorie Dillard Austin TX here in PA a lot of the newer brokers do not hold escrow, but  our agreement of sale and real estate law has very particular actions for a broker holding the escrow whilst this does not apply to title companies and attorneys.

Lawrence "Larry" & Sheila Agranoff. Cell: 631-805-4400 sellers here would feel that buyers have no skin in the game if they do not see any deposit till after inspections.

Brian England it is interesting to see how every state is different.

Nina Hollander, Broker a lot of the newer firms here do not hold escrow and because of our real estate laws that can put the funds at risk if not held by a broker.

Jan 25, 2023 04:57 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Hi Nick... fortunately, that's not an issue in North Carolina in putting earnest money at risk if an attorney holds them. Most people here consider it safer.

Jan 25, 2023 05:32 AM
Hannah Williams

Nina Hollander, Broker Pennsylvania has very strict escrow laws. The buyers and sellers are made aware of where the money is held. This is the way it has been done for many many years  

Jan 29, 2023 11:05 AM
Nina Hollander, Broker

Hannah Williams same here, Hannah. Our contract clearly states who is holding the earnest money and whoever holds it must sign an acknowledgment of receipt, which is an integral part of the contract. It's just that increasingly brokerages here do not hold earnest money except in extreme cases.

Jan 29, 2023 11:08 AM
Roy Kelley
Retired - Gaithersburg, MD

This is good information to share with home buyers. 

Have a great day and an outstanding week.

Jan 25, 2023 06:01 AM
Kathy Streib
Cypress, TX
Home Stager/Redesign

Hi Nick- what a thorough explanation of earnest money and where it goes. It's also a good reminder that real estate is local. Even someone reading this out of state will get a good understanding of it. 

Jan 25, 2023 12:23 PM
Nick Vandekar, 610-203-4543
Realty ONE Group Advocates 484-237-2055 - Downingtown, PA
Selling the Main Line & Chester County

Nina Hollander, Broker the main thing here are the rules brokers must abide by when holding escrow and deposits. Attorneys and Title Companies do not have to abide by those same rules. 

Roy Kelley Thank you, stay dry.

Kathy Streib thank you, I had not realized how different every state was till reading some of the comments.

Jan 25, 2023 02:20 PM
Kathy Streib
Cypress, TX
Home Stager/Redesign

Jan 28, 2023 06:35 PM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning Nick. As a managing broker, when active, did not accept earnest money in Illinois or Florida for years. Always used an attorney or title company. It was much easier and perhaps much safer. Our contracts had specific language regarding earnest money disputes. Different strokes for different folks. Enjoy your day.

Jan 29, 2023 04:52 AM
Leanne Smith
Dirt Road Real Estate - Golden Valley, AZ
The Grit and Gratitude Agent

Yes PA is different than AZ.  Most brokerages here in Mohave County always have earnest funds held by escrow. Having a broker account is subject to additional scrutiny by the AZ Dept. of Real Estate.

Jan 29, 2023 05:44 AM
Adam Feinberg
Elegran - Manhattan, NY
NYC Condo, Co-op, and Townhouse Advisor

The mantra all real estate is local is surely in play here because your best practices in PA. doesn't match the procedures in NYC.

In NYC, the attorney's handle the contract, and the 10% earnest money deposit (occasionally less but it's far less common) goes to the seller's attorney IOLA escrow account and I believe the attorney is required to maintain insurance for this account. 

If the buyer is wiring the money direct or if their attorney is wiring the money- the account instructions need to be verified verbally prior to sending the wire. There have been too many instances of hackers intercepting the wire instructions over email- so now it's considered routine to verify account instructions prior to wiring any money. 

Jan 29, 2023 06:42 AM
Hannah Williams
HomeStarr Realty - Philadelphia, PA
Expertise NE Philadelphia & Bucks 215-820-3376

We are not a RE attorney state. In most Real Estate transactions in Pennsylvania Real Estate agents fill in the blanks of forms prepared by attorneys unless there is a legal problem with the property we usually do not have the need to use an attorney. @As Nick Vandekar, 610-203-4543 said we transfer funds to the title company my company does not wire we walk the funds to the title company day of closing they, in turn, remove all liens. mortgages and any judgments they deem necessary and  file it with the City or Township - Our Real Estate Companies are Licensed with the State to hold Esrows and the laws are very specific 

Thank you Kathy Streib for Featuring this as it did bring to light that Real Estate is local 

Jan 29, 2023 10:59 AM
Wanda Kubat-Nerdin - Wanda Can!
Red Rock Real Estate (435) 632-9374 - St. George, UT
St. George Utah Area Residential Sales Agent

Nick-

If a brokerage has a trust account the EM can be held there, otherwise a title company holds the EM and both parties must agree to get the funds released if the buyer backs out prior to the last deadline. If the buyer backs out after the last deadline, the money goes to the seller. There are exceptions as well to that!

Jan 29, 2023 05:09 PM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Nick:

What a great topic and explanation for buyers in PA. It's important for them to know the process. And it's a good example of how things are handled differently in other states!

Jeff

Jan 29, 2023 07:29 PM
Nick Vandekar, 610-203-4543
Realty ONE Group Advocates 484-237-2055 - Downingtown, PA
Selling the Main Line & Chester County

Kathy Streib thank you for sharing this I always appreciate your support.

Wayne Martin we are not an attorney state. All our forms are created by attorneys and we fill in the blanks. Our agreement explicitly states that the deposits will be held by a broker, usually for the seller.

Leanne Smith yes, our broker accounts are also under additional scrutiny by the PA Real Estate Commission.

Adam Feinberg our brokerage wires the funds to settlement and makes sure to verify the instructions. Our brokerage title company uses a secure portal to transfer wire instructions, we do not use email and warn our clients of fraud as you mention.

Hannah Williams I never thought this would create so much discussion, very interesting as you say, it highlights how local real estate is and why you need to use a local agent.

Jan 30, 2023 06:37 AM
Adam Feinberg

In NYC, the attorney's take care of settlement, verify wire transfer instructions, and work with the title company's. Once an agent has an accepted offer- the attorney takes over with due diligence, the contract, title issues (co-op's aren't real property- so that step is generally skipped if the sale is of a co-op), wire transfers, and once in contract, the attorney takes care of settlement/closing. The agents main role after an accepted offer is mostly to manage all parties making sure the process is moving along and to help with bottlenecks, and if working with a buyer that needs to complete a condo or co-op board package- that tends to be 2-3 weeks of work once the buyer is in contract. 

Jan 30, 2023 07:12 AM
Nick Vandekar, 610-203-4543
Realty ONE Group Advocates 484-237-2055 - Downingtown, PA
Selling the Main Line & Chester County

Wanda Kubat-Nerdin - Wanda Can! we are seeing many of the newer brokerages are not opening trust accounts and holding escrow. So, when representing a buyer we are using our brokerage escrow accounts as the laws are different in PA for brokerages and attorneys and title companies.

Jeff Dowler, CRS it has been interesting to see the variations between the states.

Jan 30, 2023 06:39 AM