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.
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