What happens to unclaimed good faith deposits? As this loyal reader points out, there are many options which vary depending on your location.
Q: Every Sunday morning, your article is one of the first two or three that I read in my local paper. Thank you for enlightening me and the public on real estate matters. This really is not a question, but a follow-up comment on your recent article on a problem a seller was facing when a buyer defaulted on his contract to buy and then never responded to the seller’s demands to turn over the earnest money.
As you know, real estate laws and real estate practices vary from state-to-state, as well as from city-to-city. You mentioned there being three options for the parties involved.
Due to an Ohio House Bill which I think became effective in 2009, I wanted you to know that in Ohio we now have a fourth option. If we wish, we may include language in our purchase contract that specifies that if the buyer and seller fail to reach a written resolution within two years, and there is no court order determining disbursement, the money can be returned to the buyer after two years unless there are pending legal proceedings. This has been widely adopted throughout Ohio and is a provision of all the real estate board forms that I am aware of.
Your State Determines Where Unclaimed Good Faith Deposits Go
A: Thank you for your comment and for being a loyal reader of our column. You’re right, real estate laws and customs vary from state to state, from county to county and even from neighborhood to neighborhood. For this reason, we try to give general answers and then suggest that our readers consult with professionals where live for more specific options.
Interestingly, your fourth option would be good for the buyer of our prior column but it was the seller that had the issue. The buyer in our column failed to show up at the closing and left the seller high and dry. For that seller, even in Ohio under the fourth option, litigation would be the only way to get the money. And, if the buyer just waits out the clock, the buyer will end up getting the money back – which isn’t always the just resolution.
Sam has had real estate deals where the buyers have simply disappeared. In one case, the buyer left the country to help an ailing friend and was out of contact for a full year. No one seemed to know where this buyer was and the buyer never responded to emails, phone calls or mail. During the Great Recession, Sam heard of some sellers abandoning their homes by simply disappearing.
In the first situation, the seller was left to wonder what to do and in the other, the buyer was left without the ability to buy the home as the seller was nowhere to be found. We assume that the Ohio solution is an attempt to guide real estate brokerage houses that may hold the earnest money from the purchase or sale of a home with fund disbursement.
While the law may assist in some situations, it might also force sellers to take legal action to get the earnest money.
What Happens to an Unclaimed Good Faith Deposit When the Buyer Backs Out?
On the other hand, in situations where buyers disappear, even after the two years are up, the party holding the earnest money may not know where to find the buyer in order to send the money back. Ultimately, a seller and buyer will have to decide how to proceed where a seller refuses to release the earnest money back to the buyer or a buyer refuses to release the earnest money to the seller.
This might be a fifth option: Under the umbrella of litigation, the parties can consider using arbitration. Many real estate contracts now have arbitration provisions. So, if the parties have a dispute, the aggrieved party can try to use the arbitration mechanism, which we’d hope would be less expensive for both parties.