An often asked question regarding the deposit of escrow is “when”. Fortunately, the Virginia laws regarding escrow do not change if it is a Short Sale. Virginia law requires earnest money deposits (“deposits”) to be deposited into Broker’s escrow accounts within 5 days which the bank is open. (This means if the bank is opened from 9-12 on a Saturday, it counts as a day)
It’s important to remember: The law does not change because the Seller is pursuing a Short Sale.
Virginia 18VAC65-30-120. Escrow account.
Within five banking days after the day of receipt of any money from the contract buyer and until the time the money is invested in a trust, life insurance, or annuity policy, the contract seller or the contract provider shall deposit the money into an escrow account in a bank or savings institution approved to do business in the Commonwealth.
Deposits are not required for a contract to be considered ratified, but many Short Sale lenders will not seriously consider a contract if there is no reasonable deposit.
Some agents have considered using Promissory Notes that mature upon written notice of the Lender that the Short Sale has been approved. Remember that Promissory Notes need to have a definite end date. In addition, if the Note is released it should be done in the same manner as an escrow mutual release agreement.
Deposits can only be released in one of three manners; 1) mutual consent of the principals 2) order from a court of competent jurisdiction and 3) if it is clear by the terms of the contract then the Broker may send a letter to all parties giving them 30 days to stop the disbursement. (spefic steps must be followed for option 3 so please read the statute prior to using that method of disbursement).
The issue of the release of the deposit is complicated in a Short Sale transaction if the Seller’s Lender declines to agree to the contract terms. If the Seller wishes to continue to try and get an answer or is desperate for keeping the Buyer in the contract, he or she may decline to reimburse the escrow back to the buyer. The Broker may not disburse the funds without the requisite 30-day letter, mutual agreement executed by all parties, or a court order.
It’s important for the Buyer Agent to explain all of this to the Buyer at the time they are making an offer to avoid incorrect presumptions. The rate of failure for a Short Sale is very high and often Buyers are expecting an immediate release of the deposit. The Agent will serve themselves and their clients well by setting reasonable expectations early on.
As an added reminder, Brokers are compelled by the 2008 change to the Virginia law to report any mishandling of escrow in a timely manner. This includes agents in one’s own office.
18VAC135-20-180. Maintenance and management of escrow accounts.
C. Actions including improper maintenance of escrow funds include:
5. Failing, as principal broker, to report to the board within three business days instances where the principal broker reasonably believes the improper conduct of a licensee has caused noncompliance with this section.
REALTORS® are highly encouraged to handle escrow deposits as a serious matter and ensure that these funds are turned into the lender as soon as the contract if ratified. Remember that ratification occurs when the Buyer and Seller, as Principals execute and deliver the contract to each party. The Lender as the “Third Party Approver” is not a Principal and therefore irrelevant to the issue of escrow deposit.
