Escrow companies, neutral third parties hired to hold funds involved in sales or service transactions, hold deposits called "earnest money" made by buyers as part of a real estate purchase contract. The escrow officer follows the directions outlined in the contract and releases funds according to the directions given in the agreement or when the seller signs a statement to release the deposit. Property buyers typically use the earnest money deposit as a partial payment for the purchase.
An escrow company or agent only holds a buyer's escrow deposit, pending the sale of real estate, at which time the deposit is applied toward the purchase, less any fees or costs to the escrow company. In some cases, the escrow company returns the deposit to the buyer, depending on the terms of the sales contract.
Buyer's Escrow Deposit
The escrow company applies the buyer's deposit as a down payment for the purchase of the home when the seller agrees to the offer. Real estate agents in some states, including counties in California, log deposits on a formal real estate office register and the agent's supervising broker then places the deposit into a separate office account until transfer to the escrow account. Real estate agents or brokers typically return the full deposit to the buyer when a sales cancellation comes before the buyer or seller sign the final sales contract and before the deposit moves to the independent escrow account.
Potential Escrow Fees
The buyer pays for any services performed before cancelling the sales agreement, including the property appraisal and any home inspections. Escrow companies charge the buyer and seller for the account and also for services, such as fees for photocopying or supplying a courier to transfer documents related to the home sale. Escrow also bills on behalf of other firms contracted under the sales agreement, including the title company for the property title research, an appraisal done to qualify for the home mortgage and any home inspections ordered by the buyer.
Buyers generally pay for these costs as a separate bill and receive the sales contract deposit as a paper check refund or as a cash transfer to the buyer's bank account. Buyers can direct escrow, however, to use the sales deposit to pay for escrow fees and other charges on a canceled sales transaction.
Escrow Deposit Refunds
Most sales contracts list specific conditions for returning the buyer's escrow deposit. Property agreements generally require the seller to return the buyer's deposit, such as when the seller cancels the sales contract, or when the home appraisal fails to match the contract selling price. When borrowers don't qualify for a mortgage to purchase the home, most sales contracts also require escrow to return the buyer's deposit.
Disputed Sales Contracts
Sometimes the seller might challenge the return of the buyer's deposit. The seller must legally show that damages suffered as a result of the broken sales contract to keep the deposit. The escrow company receives official notification of the legal decision -- for example, from a judge if the case went to court -- and gives the deposit to the seller or buyer accordingly.
- U.S. Consumer Financial Protection Bureau: What Is An Initial Escrow Deposit?
- FindLaw: Battles Over Real Estate Escrow Deposits
- NOLO: Buying a House FAQ
- Consumer Financial Protection Bureau. "§ 1024.17 Escrow Accounts." Accessed Sept. 13, 2020.
- North Carolina Real Estate Commission. "Questions and Answers on: Earnest Money Deposits." Accessed Sept. 13, 2020.
- South Carolina Association of CPAs. "SCDOR’s Online State Tax Lien Registry Launches on Nov. 1." Accessed Sept. 13, 2020.
Lee Grayson has worked as a freelance writer since 2000. Her articles have appeared in publications for Oxford and Harvard University presses and research publishers, including Facts On File and ABC-CLIO. Grayson holds certificates from the University of California campuses at Irvine and San Diego.