When the Title Company Holds the Earnest Money

As more transactions involve title companies serving as the earnest money holder, REALTORS^® are asking an important question: If a title company holds the earnest money instead of a real estate firm, do the earnest money provisions in the WB offer to purchase still apply?

The short answer is no.

The earnest money disbursement provisions in the WB offers are drafted to govern situations where a real estate firm is holding the earnest money. Those provisions are designed to be consistent with Wis. Admin. Code Ch. REEB 18 Trust Accounts, which establishes the procedures Wisconsin real estate firms must follow when holding and disbursing trust funds. Those administrative code requirements apply to licensed real estate firms, but they do not apply to title companies. In addition, because a title company is not a party to the offer to purchase, it is not bound by the offer's earnest money disbursement provisions. Instead, the terms of any escrow agreement between the parties and the title company will generally control how and when the earnest money is disbursed.

Review the escrow agreement carefully

Many title companies provide the buyer and seller with a separate escrow agreement before accepting earnest money. These agreements typically establish the procedures for releasing the earnest money at closing and, if the transaction does not close, the process for resolving competing claims to the earnest money. However, because some title companies do not use a separate escrow agreement, buyers and sellers should determine early in the transaction how the earnest money will be held and what procedures will govern its disbursement if the transaction does not close

Licensees should encourage buyers and sellers to carefully review any escrow agreement before signing it. For example, some title company forms require both parties to authorize any disbursement of earnest money. While that approach may reduce the title company's liability, it may not reflect the parties' expectations or be as flexible as the disbursement procedures they would have preferred. In some situations, the parties may wish to consult with their attorneys regarding whether different escrow instructions would better meet their needs.

What if there is no escrow agreement?

A separate escrow agreement is not legally required simply because a title company is holding the earnest money. However, it is strongly encouraged.

Without an escrow agreement, the buyer and seller may not know the procedures the title company will follow when disbursing the earnest money at closing or how the funds will be handled if the transaction fails to close. That uncertainty can create confusion or disputes at the very time the parties are already dealing with a failed transaction.

Ideally, the escrow agreement should be signed before or at the time the earnest money is deposited with the title company. If the parties already have an accepted offer before the escrow agreement is presented, they may sign the agreement after acceptance and amend the offer to acknowledge that the earnest money will be governed by the escrow agreement.

If the title company does not provide an escrow agreement, the CAUTION in the WB offers recommends that the parties or their attorneys draft one. This recommendation is reflected in the CAUTION at lines 63-65 of the WB-11 Residential Offer to Purchase:

“CAUTION: If a Firm does not hold earnest money, an escrow agreement should be drafted by the Parties or an attorney as lines 67-87 do not apply. If someone other than Buyer pays earnest money, consider a special disbursement agreement."

Can the offer override the title company's procedures?

Some have suggested adding language to the offer stating that the earnest money provisions in the offer control regardless of who holds the earnest money.

While well-intentioned, that approach has limitations.

The buyer and seller may agree between themselves how they would like the earnest money handled, but the title company is not a party to the offer to purchase and is not bound by provisions contained in it. The title company may instead follow its own escrow procedures, which may have been developed in consultation with its legal counsel. Simply adding language to the offer may not resolve a conflict if the title company requires different disbursement instructions.

Practice tips for REALTORS^®

When a title company will hold the earnest money, REALTORS^® should help their clients understand that the disbursement process may differ from transactions where a real estate firm holds the earnest money. REALTORS^® should explain that when a title company holds the earnest money, the title company's escrow procedures — not the trust account procedures applicable to real estate firms — will generally govern the handling and disbursement of the earnest money.

REALTORS^® should also encourage buyers and sellers to determine early in the transaction whether the title company requires a separate escrow agreement and to carefully review that agreement before signing. If the title company does not use a separate escrow agreement, the parties should determine what procedures will govern the earnest money if the transaction does not close.

If an escrow agreement is used, the parties should understand that its terms — not the earnest money disbursement provisions in the offer to purchase — will generally govern the release of the earnest money. Reviewing those procedures before the earnest money is deposited can help avoid surprises and reduce the likelihood of disputes if the transaction does not close.