It seems that whenever things are settled into a regular routine, suddenly changes happen when you least expect them. One issue that is always in the forefront of real estate investing is who should hold an escrow deposit for a purchase or sale. While escrow deposits are only given by buyers in a real estate transaction, the seller and the buyer must agree on who holds the deposit and when and if it is disbursed if the buyer doesn't close.
If you are the seller in a transaction, your options to hold the escrow deposit that your buyer will be giving you are:
1. Hold the deposit yourself with the check made to you or your entity (company or LLC). This is the best way to control the deposit in case the buyer reneges and doesn't close. You should "segregate" these funds in your checking account as some states require escrow deposit accounting at any time. I was involved in a transaction where the seller asked me to make the escrow payable to a company called National Escrow Company or a similar name. Actually, this was his company that he had formed just to hold escrows but the title gave the buyer a little sense of security instead of making it payable to John Smith.
2. Have your attorney hold the escrow which gives you some degree of control but in case of a dispute later, you'll have little chance of getting the funds unless the buyer signs a release or you go to court. Should be simple because your contract stipulates if the buyer doesn't close you get the deposit, but the buyer can still sue for breach of contract and hold the deposit from being disbursed. This is easily resolved by having language in your contract that stipulates and authorizes the release of the deposit if the buyer doesn't close on or before the prescribed closing date. Have this language approved by your closing agent before you give the buyer your contract to sign.
3. Allow the buyer's attorney to hold the escrow deposit. This is a worst-case scenario because you have an adversarial relationship on your hands to begin with and the buyer's attorney is not going to release the deposit unless authorized by his client - your buyer. If you allow the escrow to be held in this manner, make sure your language that specifies release and disbursement in your contract is agreed to by his attorney before you sign. This may be a deal-killer so be ready to make a decision of how important is this buyer.
4. Independent escrow agent that is "neutral" to both parties. This is no better than number 3 above, except that the buyer may agree more easily than giving the deposit to your attorney. Again, the critical aspect is the clause in the contract that allows you to control the escrow by a written authorization to the escrow agent to disburse the funds automatically if the buyer doesn't close for any reason. Likewise, the clause has to say that you agree to release the escrow if you can't close for any reason.
The key to making an escrow work is to make sure you have verbiage in your Purchase and Sale Agreement (contract) that clearly stipulates that the escrow agent is authorized to disburse the escrow in case either party doesn't come to the closing table timely. If the contract has contingent clauses such as for financing and the buyer can't qualify for a loan, the deposit must be returned. This is one reason to not sign contracts with buyers who need financing unless you know absolutely that they can get financing - which is almost impossible to know these days. The release of the escrow is less affected in cash transactions and that's why investors try to deal with cash buyers, especially in wholesaling properties.
If your closing agent (or attorney) won't write the legal language to release the escrow "automatically", find another closing agent who will because somewhere down the road you will have the problem of not being able to get the escrow to which you are entitled.
