State of ohio earnest money laws
Earnest money deposits are involved in almost every real estate transaction.
Although not essential to the creation of a valid and binding purchase agreement, it is the rare residential real estate transaction that does not require the buyer to make an earnest money deposit. The earnest money is almost always turned over to the real estate broker who holds the money in trust for the parties to the transaction.
Since the Ohio real estate licensing laws place some very definite obligations on the broker with respect to the earnest money deposit, it is the purpose of this paper to discuss generally the law of earnest money and, more specifically, the manner in which the broker should handle the earnest money deposit to comply with the state licensing laws. When the real estate transaction is closed, the earnest money is either returned to the buyer or the buyer is given a credit against the purchase price.
Brokers must deposit earnest money into their trust or special account as soon as possible upon receipt. The Division generally considers hours to be a reasonable time, but does weigh the circumstances in determining what is reasonable. The terms of the purchase contract will also be weighed in determining when the earnest money shall be deposited by the broker. For example, if the contract provides for the earnest money to be deposited upon acceptance of the offer, the duty to deposit will not begin until the offer is accepted.
If the contract is silent on this point, the earnest money should be deposited within hours after receiving it. The purchase contract should be reviewed for language that indicates which broker will hold the funds. If it is silent, the broker to whom the funds were made payable should deposit it in his trust account. Occasionally a seller usually a builder or developer may want to hold the earnest money. This may be done as long as the buyer agrees and it is specified in the purchase contract.
If this is done it is important to delete any references in the purchase contract to the broker holding the earnest money or refunding it.
Again pre-printed references in the purchase contract that do not apply should be deleted. Occasionally the parties may want a large earnest money deposit to earn interest.
This goal can be achieved by having a party other than the broker hold the earnest money. Another alternative would be for the parties to establish an account in their joint names. Any such arrangement should be set forth in the purchase contract and should specify to whom the interest will be paid.
Again, pre-printed language in the contract referencing the broker holding the money should be stricken. Under Ohio license law a promissory note for earnest money may only be accepted with the knowledge and written consent of the seller. Therefore, it is extremely important to clearly identify on the purchase contract if a note is being taken. If the seller accepts the offer, this would constitute his consent to the earnest money being taken in the form of a note. It is important to realize that if the note is made payable to the broker, the broker is the only party with standing to sue on the note in the event the buyer defaults; therefore brokers may want the note made payable to the seller.
If a check for earnest money is returned for insufficient funds, or the broker is unable to collect earnest money the buyer is required to pay under the terms of the purchase contract, the seller must be notified of this fact as soon as possible; failure to do so by a broker has been found to be a violation of the license law.
Frequent violations of the license law occur where licensees misrepresent the receipt of earnest money by signing a receipt for it on the purchase contract when in fact they have not received it, have received less than indicated, have received a postdated check, or have taken a note without so indicating.
Therefore, licensees must exercise care to make sure that any notations they make or statements they sign on the purchase contract reflect the true circumstances and facts. There is almost never a problem with an earnest money deposit when the real estate transaction actually closes. However, problems do arise when the real estate transaction fails, for whatever reason, and there is no closing. This situation invokes not only the general law with respect to earnest money but should also cause the broker to examine his obligations with respect to the licensing laws.
The general rule with respect to earnest money deposits is that the buyer should be entitled to a return of the deposit if the contract does not close through no fault of the buyer.
Conversely, the seller should be entitled to the earnest money deposit if the buyer breaches the purchase agreement. Most purchase contracts contain contingencies most commonly relating to financing and inspection , which excuse the parties from performance if the contingencies are not satisfied or removed.
If the contingencies are not satisfied, notwithstanding good faith efforts by the parties, then the contract is null and void, and the buyer should be entitled to a return of the earnest money deposit. However, if the buyer does not act in good faith in attempting to satisfy the contingency, then a court may rule that the seller is entitled to the earnest money even though the contingency has not been satisfied or removed.
When a real estate transaction fails, the parties often want the broker to decide which party is entitled to these funds. This is a position in which a broker should never place himself because the decision as to the proper recipient of the earnest money is a legal decision which should be made by a lawyer or the courts. The difficulty of this decision is compounded by the fact that the broker owes fiduciary duties to at least one of the parties, and naturally those duties include obeying the lawful instructions of that client.
To avoid placing the broker in this difficult position, the Ohio Real Estate Commission and the Division of Real Estate and Professional Licensing took a longstanding position that a broker was not permitted to disburse earnest money to any party unless the other party to the transaction has provided him with a release or authorization to do so.
If the parties refuse to give the broker appropriate authorization to disburse the funds, then the broker was required to keep the funds in his trust account until the parties provide him with an appropriate authorization or until a court of law orders him to disburse the funds. However, this policy was not set forth in the Ohio license law.
| Earnest Money
On January 6, , Governor Strickland signed into law legislation that provides greater statutory authority and options to brokers regarding the handling of disputed earnest money. This legislation was the result of an Ohio Association of REALTORS Task Force that studied the problems created when a transaction fails to close and the parties cannot agree on who is entitled to the earnest money.
This is now codified in Section See EXHIBIT A This section also clearly states that a broker must maintain earnest money in his trust account until one of the following occurs:. The transaction closes and the broker disburses the earnest money to the closing or escrow agent or otherwise disburses the money pursuant to the terms of the purchase agreement;. The parties provide the broker with written instructions that both parties have signed that specify how the broker is to disburse the earnest money;.
The broker receives a copy of a final court order that specifies to whom the earnest money is to be awarded; or. The funds become unclaimed as defined in Section Therefore, there should be some discussion of these legal obligations in the purchase agreement that the parties execute. Many form purchase agreements recite only that the broker has received a specified sum of money as an earnest money deposit, and then when the transaction fails, the parties are surprised that the broker cannot simply return the deposit to the buyer or turn it over to the seller.
Namely, that if the transaction fails to close, the broker must maintain the earnest money in his trust account until the parties provide him with written instructions signed by both parties, a court order specifying to whom it is to be awarded or it becomes unclaimed under Ohio law and is remitted to the Ohio Division of Unclaimed Funds.
A second goal of HB was to create a process that would create a time limit on how long a broker must continue to hold such disputed funds. Such a provision is optional under HB If they fail to notify the broker that they have done either one of these two things, then under the terms of the contract, the broker will return the earnest money to the purchaser without any further notice to the seller.
By including such a provision, brokers are able to disburse these disputed earnest money deposits after two years from the date of deposit. It is believed this is ample time for the parties to either resolve the problem on their own or to initiate the necessary legal action to do so.
Lawriter - ORC - Earnest money to be maintained in special account.
Below is sample language that has been approved by the Ohio Division of Real Estate and Professional Licensing that satisfies the new law. Again, it is not required that brokers include this language in their contracts; instead, it is an option available to brokers who choose to use such a provision to resolve earnest money disputes. In the event of a dispute between the seller and purchaser regarding the disbursement of the earnest money, the broker is required by Ohio law to maintain such funds in his trust account until the broker receives a written instructions signed by the parties specifying how the earnest money is to be disbursed or b a final court order that specifies to whom the earnest money is to be awarded.
Playing Hardball with Earnest Money
Under HB , brokers who are obligated to return earnest money to a buyer under such a provision in the purchase agreement will have no later than September 1 of that calendar year to disburse the money to the buyer.
While brokers certainly will want to make this disbursement as soon as the two year time period has run, this September 1 date was included in the legislation to provide a clear, definable deadline. In the event the broker is unable to locate the buyer, the broker should follow the Unclaimed Funds Laws and disburse the money to the Ohio Division of Unclaimed Funds.
Such a court order will usually be the result of litigation initiated by either the buyer or seller. In some instances, however, the broker may choose to file the legal action to obtain the necessary court order to determine entitlement to the earnest money.
In this type of action, the broker would be the plaintiff in the case and would name as defendants both the buyer and the seller. In his complaint he would ask the court to determine whether the earnest money deposit should be paid to either the buyer or the seller.
Procedurally, it would probably be easiest for the broker to wait for the buyer and seller to commence an action, rather than commencing the action himself. Nevertheless, there may be situations in which the broker may want to commence the action himself so as to clear his trust account of the earnest money deposit. This is especially so if a broker does not include the new optional contract language.
Attached hereto as EXHIBIT B is a form complaint that can be used in these situations. This complaint complies with the local rules of the Franklin County Municipal Court, Small Claims Division, and we have been advised that the Franklin County Small Claims Court would indeed handle cases such as this.
Although, the Franklin County Small Claims Court has advised that the broker could pay the money into court at the time he filed the complaint, ORC Section Therefore, the broker should keep the money in his trust account pending an order of the court.
The cost filing fees are also substantially less than filing fees for the regular Municipal Court or the Common Pleas Court. There are some other limitations on the use of the Small Claims Court, and therefore, it is important that the attached EXHIBIT B be reviewed with legal counsel in the particular county in which the action is to be brought or that the broker at least discuss the complaint form with his local Small Claims Court.
Small Claims Court Administrators are typically very helpful and will advise the broker of any changes that must be made to the form to comply with the law in that particular jurisdiction. Many Small Claims Courts have particular forms that can be used for handwritten complaints, and therefore, it is very easy to commence an action in these courts.
Attached as EXHIBIT C is a blank form that is used by the Franklin County Small Claims Court. The same complaint language as found in EXHIBIT B can be used, but the reference to the Small Claims Court should be deleted. Furthermore, there will be a different filing fee depending upon the county, and the broker should check with the Clerk of the Municipal Court in his jurisdiction to determine the amount of the filing fee.
This occurs when the holder has not had correspondence with the owner of the funds for the dormancy period. The first requirement is that the broker has had no correspondence with the buyer and seller for a period of two years. This form is contained in the Annual Report. If no response is received or if the notice is returned for a bad address, the broker can remit the earnest money to the Division of Unclaimed Funds.
The broker is required to have another two year period with no correspondence with the buyer and seller before the due diligence notice could be sent again. The unclaimed funds law requires all brokers to file an Annual Report with the Division of Unclaimed Funds Form OUF-1 Unclaimed Funds Reporting Form.
The Annual Report is due by November 1 of each year even if there are no unclaimed funds to report. The Annual Report is due by November 1 for funds dormant as of the preceding June Additional information regarding the unclaimed funds regulations, reporting requirements and reporting forms can be obtained from the Division of Unclaimed Funds website at www.
Although not required by law, earnest money has become a customary part of real estate purchase contracts in Ohio. Brokers and agents must be knowledgeable regarding the license law requirements to deposit, maintain and disburse such funds from the brokerage trust account. Language allowing brokers to disburse disputed earnest money after two years may now be included in purchase agreements by brokers in their discretion.
Such a provision is recommended to avoid maintaining such disputed funds indefinitely. See Exhibit A in. See Exhibits B and C in.
Website Design by Marcy Design. Home Video Series Legal Ohio HB Resources ADA Website Compliance: Tying Arrangements Broker Toolkit: Branch Offices Broker Responsibilities: Change of Address Broker Responsibilities: Displaying Licenses Broker Responsibilities: Handling Licenses Broker Responsibilities: Maintaining Office Records Broker Responsibilities: Office Requirements in the License Law Broker Responsibilities: Office Sign Broker Responsibilities: Supervisory Duties Broker Toolkit: Commission Issues Commission Issues: Broker to Broker Commission Issues: License Law Provisions Broker Toolkit: Independent Contractor Broker Toolkit: Legal Forms of Licensure as a Broker Legal Forms: Business Names Legal Forms: Sole Proprietorship Broker Toolkit: Real Estate Settlement Procedures Act Broker Toolkit: Trust Account Responsibilities Broker Toolkit: Unauthorized Practice of Law Legal Action Program Legal Hotline Legal Topics ADA website compliance Advertising Advertising White Paper Articles Advertising License Law on Advertising License Law on General Advertising License Law on Team Advertising Agency Auctions WP: Is an auction right for my client?
Preparing for the auction Bed Bugs Commercial Broker Lien Law Related Articles Commercial Commercial: March 5, Commissions IRS Requires Reporting of Cooperative Commissions EC: Claims of Fraud for Failure to Disclose WP: Materiality includes Stigmatized Property WP: Source of the Duty to Disclose WP: Paperless Transactions Earnest Money Trust Accounts Earnest Money Trust Account Articles Earnest Money White Paper General License Law Property management accounts Ethics Fair Housing Discriminatory Advertising Discriminatory Conduct Fair Housing Articles Military status: Providing mortgage information may trigger new duties OR: MARS Rule Stayed Web: July New Requirements for short sales: Referrals Related Articles Inducements Lead-Based Paint FAQs on new lead-based paint rules OR: June New lead-based paint rule now in effect OR: REALTOR Resource for Short Sales, REOs Mediation strives to stem foreclosures OR: March Short sale fraud continues; Agents must present all offers OR: April Technology and the Law Bounce Back From 5 Technology Blunders E-mail the right way OR: Week in Review 6.
Distinguished Service Award Winners: Excellence in Community Service Award Winners: Barnes RPAC Achievement Award Winners: Protect your clients and yourself Buzz: Joann Amos, Leonard Partin DVPs 3: Rick DeLuca, Sandra Green DVPs 5: Spruce it up inside and out Summer Attic Insulation Saves You Money Do-It-Yourself Home Security Check: Doors are First Line of Defense Do-It-Yourself Home Security: The Mortgage Forecast Home Upgrades with the Lowest Return on Investment ID Theft: Introduction Earnest money deposits are involved in almost every real estate transaction.
Depositing Earnest Money Brokers must deposit earnest money into their trust or special account as soon as possible upon receipt. Interest on Earnest Money Occasionally the parties may want a large earnest money deposit to earn interest. Notes Under Ohio license law a promissory note for earnest money may only be accepted with the knowledge and written consent of the seller.
Misrepresentation regarding earnest money Frequent violations of the license law occur where licensees misrepresent the receipt of earnest money by signing a receipt for it on the purchase contract when in fact they have not received it, have received less than indicated, have received a postdated check, or have taken a note without so indicating.
Returning earnest money There is almost never a problem with an earnest money deposit when the real estate transaction actually closes. See EXHIBIT A This section also clearly states that a broker must maintain earnest money in his trust account until one of the following occurs: The transaction closes and the broker disburses the earnest money to the closing or escrow agent or otherwise disburses the money pursuant to the terms of the purchase agreement; 2.
The parties provide the broker with written instructions that both parties have signed that specify how the broker is to disburse the earnest money; 3. The broker receives a copy of a final court order that specifies to whom the earnest money is to be awarded; or 4.
Optional Purchase Contract Provision A second goal of HB was to create a process that would create a time limit on how long a broker must continue to hold such disputed funds. Conclusion Although not required by law, earnest money has become a customary part of real estate purchase contracts in Ohio.
OAR Social Media Facebook Facebook: Young Professionals Network LinkedIn LinkedIn: Commercial Twitter Twitter Rate of Ohio home sales reaches record-breaking level in May. Details and a market-by-market report at https: COLUMBUS OH, Phone: Interested parties may contact Robert Fletcher, OAR at Twitter Rate of Ohio home sales reaches record-breaking level in May.