3 Ways to Protect Your Escrow Deposit
You’ve made an offer on a property, the seller has accepted, and you’re ‘in contract. Now it’s time to put your money where your mouth is, as the saying goes.
At this stage of the game, the buyer puts a deposit into an escrow account (it is not given directly to the seller). The more serious you are, the more of a deposit you’ll put up, usually maxing out at 3 percent of the agreed-upon price. As a listing agent, I’m always skeptical of a buyer who puts down a small deposit of, say, $500 or $1,000.
The deposit is a good-faith gesture to the seller, indicating you’re serious about buying their home. Once deposited, this money can’t be moved or touched without written consent from both buyer and seller. Upon the close of escrow, the earnest money deposit is applied to the balance of the down payment.
That doesn’t mean you can’t get your deposit back — or lose it, if you aren’t careful. From the time you put up the deposit until you close escrow, a lot can happen.
Here are the top 3 ways to protect your deposit.
1. Get to know the property during inspection.
Every house, no matter if it’s a 100-year-old Victorian or a modern marvel, should have some type of home inspection before it’s sold. Your contract should include a “contingency” for such an inspection, to protect you from unwittingly buying a money pit.
In an older home, the inspector will look at the foundation, the roof, and everything in between. You can have specialized inspectors go through the property as well, such as a heating, ventilation and air conditioning (HVAC) specialist, a pool inspector, a termite inspector, or a structural engineer, if the property merits it. Even in a new condo, you’ll want to make sure the appliances work, that there are enough electrical outlets, and that they are in working condition.
Use an inspection to really get to know the ins and outs of your potential home to avoid costly surprises later.
Should the inspection uncover some problems, it’s time to decide if you can live with them or not. Inspection contingencies are often so general that the buyer can get out of the contract and have their full deposit returned. In fact, I always tell buyers that the property inspection contingency is their “get out of jail free” card. Because the contingency is often so broad, I’ve seen buyers use it as a way to walk away from a home they’ve had second thoughts about, without losing their deposit — even when the home is in great condition. It avoids home buyer’s regrets.
2. Get written notice that your loan has been approved and make sure the property doesn’t appraise for less than the purchase price.
Given tougher lending standards since the credit crisis, the appraisal/loan contingency is more important than ever.
You must have a contingency clause that allows you, the buyer, to receive full written approval from the bank for your loan. If your loan broker isn’t willing or able to give you written notice that your loan has been fully approved, do not remove this contingency. If you do, you risk forfeiting your deposit. I’ve seen lenders pull out or deny the loan at the last minute — like the day before they’re set to fund.
To protect your deposit, grill the loan broker and don’t feel pressured by the seller to move ahead. It’s absolutely appropriate to ask the seller for an extension if you need one. Everyone in the transaction should want to work together to make the deal go through. But if you sign off that you’re approved and then you’re denied a loan, you risk losing your deposit.
An appraisal contingency should be added to the loan contingency as well. The property needs to appraise at no less than the purchase price. Some buyers have a larger down payment and they may get loan approval even if the property appraisal comes in low. This isn’t good news. And as the buyer, you should be able to walk away or renegotiate the purchase price if the appraised value is less than the contract price.
3. Review the property disclosures carefully.
Along with property inspections, sellers are required in most real estate markets to complete a series of disclosures regarding their knowledge of and experience with the property. By law, sellers are required to disclose property defects, neighborhood nuisances, or anything that would negatively affect the property. Additionally, you should have the opportunity to review any local or state reports like a building permit history or a flood/earthquake map.
You should receive the seller’s disclosures and any required reports soon after your offer is accepted. In some markets, you may receive these disclosures before you make an offer. If you discover something negative about the property, this is your chance to say “no thanks” to the seller.
However, you’ll be required to sign off on these disclosures and reports. Once you’ve done that, your deposit is at risk. So take your time. Review everything carefully. Don’t be afraid to ask questions about what you’ve learned. If you feel something is vague, or if a particular disclosure brings up an issue for you, investigate it. Go back to the listing agent or the seller and ask for additional documentation, because your deposit is at stake.
For example, in one case, a seller disclosed there was some leaking in one window in the rear of the house. On the surface, it appeared to be a small leak. Upon further discussion and investigation, however, it was discovered that the leak was part of a much bigger roof and gutter/dry rot problem.
Thousands of dollars are at stake
Depending upon a home’s price, a buyer’s earnest money deposit can be a significant sum. A 3 percent deposit on a $450,000 property, for example, would be $13,500. That’s not the kind of money most people would want to lose. So take your time as you move from offer to contract to closing.
Brendon DeSimone is a Realtor and real estate expert based in San Francisco and New York. He is a contributor to Zillow Blog, has collaborated on multiple real estate books and is often quoted by major media outlets. You can follow Brendon on Twitter.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.