Dishin' Dirt with Gary Pickren

Dishin' Dirt on "Earnest Money Issues in Real Estate"

February 11, 2021 Gary Pickren Season 2 Episode 16
Dishin' Dirt with Gary Pickren
Dishin' Dirt on "Earnest Money Issues in Real Estate"
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Dishin' Dirt with Gary Pickren
Dishin' Dirt on "Earnest Money Issues in Real Estate"
Feb 11, 2021 Season 2 Episode 16
Gary Pickren

Earnest money became a big problem for real estate agents due to a South Carolina Real Estate Commission ruling a few years ago. Since that ruling, most real estate agencies quit holding earnest money. Today, closing attorneys typically hold the earnest money in trust. While on the surface this may seem to have reduced agent liability, another big issue has evolved concerning earnest money that could result in lawsuits or discipline of the agent.  this podcast examines many of the issues pertaining to earnest money and agent liability.  

Also, in the episode learn what you need to know about real estate licensee continuing education requirements and enjoy another episode of Gary's Good News Only!

Gary

Show Notes Transcript

Earnest money became a big problem for real estate agents due to a South Carolina Real Estate Commission ruling a few years ago. Since that ruling, most real estate agencies quit holding earnest money. Today, closing attorneys typically hold the earnest money in trust. While on the surface this may seem to have reduced agent liability, another big issue has evolved concerning earnest money that could result in lawsuits or discipline of the agent.  this podcast examines many of the issues pertaining to earnest money and agent liability.  

Also, in the episode learn what you need to know about real estate licensee continuing education requirements and enjoy another episode of Gary's Good News Only!

Gary

Unknown:

This is edition dirt with Gary pequin, South Carolina's only podcast dedicated to the real estate agents craft. Hey everybody. Welcome back to another episode of edition dirt. I am your minimally talented host, Gary Pickering, and we appreciate you tuning in yet again, this week's episode is going to discuss earnest money issues, lots of issues to talk about there. Also have a segment on your continuing education requirement. And Gary's good news only we'll finish out our show today. Now I need a huge favor from you guys. I want to become a minor celebrity, creating a minor star. So if you watch Seinfeld, you know that reference if not it just went over your head. But what I need from you guys is if you will follow me on Instagram and YouTube. If you'll go to Instagram and type in Pickering. Gary, that's p ck are in Gary jiahua. And on YouTube search for Blair Cato and subscribe to our page there, then it will get me on that status of trying to become a minor celebrity creating amount of start. Now if you do like this podcast, we'd ask you to please like it and subscribe and tell other real estate agents about it mostly because this little show this crazy little show about dirt has 26 five star ratings just tells you there's really no podcast out there for real estate agents on dirt. So let's jump into our show today. And the first thing we're gonna do is talk about earnest money, because earnest money has become a bigger issue. So the first thing we want to talk about when we talk about earnest money is how much earnest money should a buyer and a seller be asking for and receiving in a contract. And I think this is an area that a lot of real estate agents overlook. Because more earnest money from a buyer does typically denote more interest or ability to borrow. Now whether that's true or not, probably has no bearing on the truth at all. And people default all the time to put lots of earnest money down and so forth. But it is one of the things that a seller looks for and it is a feature. And when you are sitting here in a very tight market, putting down more earnest money might make your offer a little bit more attractive. But the problem we have with earnest money is it in most cases that I see, particularly in the Midlands is earnest money is often very minimal. I'm talking $1,000.15 $100, sometimes even less. The reason that becomes problematic is when you are in a dispute and the contract dfts then you have to start looking at what are the recourses for the buyer or the seller when one of the parties is in default. And as a real estate lawyer who represents real estate agencies all over South Carolina and have represented more than 50 agents before the South County real estate commission. I will tell you, there's always legalities and realities. And this is one of those things that when we talk about legalities and realities, realities typically when, and the reality that I think most people need to understand is that when one of the parties is in default, and the other party wants to take legal action against them for that default, their recourse is often very limited, and most often extremely painful. And what I mean by extremely painful, is it costs a lot of money to chase a very little amount of money. The attorney fees are outrageous. The court costs are expensive, and it takes months, if not years to get anywhere toward getting a judgment, which that oftentimes winds up to be uncollectible so the legality oftentimes is that your client may be legally right. But the reality of it is they haven't suffered any damages or not enough damages for the expense of hiring an attorney filing lawsuit and having this consume them for the next year or two. And so that's where your realities is gonna win out. So under our contract, whether we're talking the Central Carolina realtors Association contract in the Midlands, or the more widely used south on realtors Association contract, both of these have specific types of legal remedies available by law if one of the parties defaults. And basically what the remedies are in a nutshell in both contracts is that either party can take any any action as allowed under the law. So there's recourses would be being able to sue somebody for damages. And we can talk about damages later on. But also attorney fees and court calls when the contract allows in our contracts both allow for that. Now, the problem with this is, as I mentioned earlier, these costs are very expensive, outcome is uncertain. And the court cases often take very long time. There's also another recourse that a client can do is that is super specific performance, and that is where they sue the other party and ask the court to force them to follow through with their requirements on the contract. Well, the reality of that is I've never seen a court for somebody to buy a property because typically with the property they have to borrow money. And so very rarely in a residential matter, say a court require a buyer to go ahead and go through the transaction usually they just or damages in those situations. Now I have seen situations where a seller has defaulted on a contract and the seller has refused to go through with it and the court has made them go through it with specific performance. So those are legal remedies that are available, but outside of taking the This long expensive route, the reality of it is only recourse most buyers have his return of earnest money. And the most recourse that most sellers have is retention of earnest money. So with a buyer defaults, typically the only recourse that is really a reality for that seller is to keep that earnest money. So if a buyer of a $400,000 house defaults, and they've only put down $1,000 of earnest money, how satisfied will your seller client be that they received $1,000 as a result of their default, the mortgage payment on that house is probably closer to $2,000? Yeah, the $1,000 is not gonna cover even one month's payment. So getting minimal downpayment. earnest money in situations like that oftentimes leads the seller in a position of not being compensated when the buyer defaults. The other problem you have with earnest money is as long as the jurisdictional amounts remaining 70 $500. For magistrate court, I'm going over the 70 $500 becomes problematic because if the money is greater than 70 $500, and you were in a an action, some type of dispute over that, that requires a court filing, you have to go to the Circuit Court, which adds a lot more time and effort. You typically want to try to resolve these matters at the magistrate court level, which is I like to call the people score in a nutshell, you need to start being more cognizant of the earnest money on the buyer side, make stronger offers by putting a little bit more earnest money down so that that entice the seller to sell the property to you over the other other offer. The other thing as a seller, you want to be a little bit more cognizant of how much money you're receiving, recognizing that if the buyer wrongfully defaults, that your only recourse may be getting the earnest money. And if that's the situation, then you want to make sure that their earnest money is gonna be enough to at least satisfy the seller at a minimum. Now the other issue you have to also look at is some of the contracts such as a ccra contract states that if the buyer or seller wrongfully refuses to release earnest money, then the court can award treble damages. Now what treble damages are, are take the amount of damages in terms of my three, and they can also pay attorney fees. So that can actually be a little punitive there. So if one side is unreasonably refusing to do it, they could get hit with a pretty large judgment against them, which obviously the winning party would still have to try to collect. second issue to talk about with earnest money is that most real estate brokerages or agencies don't hold earnest money anymore. And I will explain a little bit later in our program, why this came about. But there's now a huge risk on you as an agent representing a buyer that has never been there before. And what this risk is, is if you are not holding earnest money, and is being held by a closing attorney, that oftentimes you are submitting a contract with no earnest money, and that artists money is going to be delivered at some later timeframe. Back in the day, when you're held earnest money, you would get the earnest money check, and you would get the contracts out at the exact same time so that when you presented the contract, you actually had the check in hand. Today's as the earnest money is being held mainly by closing attorneys, you're not getting the check or ever touching the check, and therefore you're not having earnest money in hand when making offers. In addition to that most color Generation Z clients don't have checkbooks and so you're not getting checks from them, even if they were if you were holding the money, the ccra contract and the state contract address these a little bit different in the ccra contract under paragraph form. You have three subsections Section A B and C subsection a says blank earnest money is to be paid by cheque cash or other and then it says Section B additional earnest money hereinafter referred to as earnest money to be delivered owner before blank and then say his earnest money is to be held in trust by blank. So assuming that a real estate closing attorney like Blair Cato is holding the money. If you don't have the check in hand made payable to Blair Cato, our recommendation is to write zero under paragraph a and under paragraph B write the earnest amount of money and then give yourself a couple of days 48 hours or whatever to get that check delivered to Blair Cato. Because if you put $1,000 in Section A and zero in Section B, it is given the impression to the set listing agent and the seller that you are in possession of the earnest money which may not be the case. The other problem you have here though is you have to follow up to make sure that money does in fact get deposited with the closing attorney. So if you accept a contract today from your buyer to present to your seller, and no check is being presented to you for the closing attorney they're going to take the check down there themselves or wire or whatever and you put it on Section B $1,000. earnest money will be delivered owner before two days from if you have 48 hours from application you better calendar that and then go back and check and make sure that the check was actually received Bob the closing attorney and had the closing attorney give you some type of verification now, because of privacy rules most closing attorney should not provide you a copy of the check. What they probably need to do is provide you some type of receipt form saying yes, we are in receipt of that money. Now some attorneys could take the check and maybe blank out the account numbers and things of that nature. But there is a privacy issue you have to be aware of the state contracts a little bit different. The state contract under paragraph five says the total blank artists money is paid as follows. And it says blank copies that accompanies this offer and blank will be paid by 6pm on blank and artist money is to be in the form of either a cheque cash or other to be credited to bar closing. And so what they allow you to do is fill in how much earnest money is with the contract offer, and or how much money will be paid by six o'clock on a specific day that your client selects, which might be a better way of doing it. But however, it still leaves you that risk that if your client does not deliver the money to the closing attorney or whoever's holding earnest money, then you might have some legal issues. Because when you present this, you are presenting this as fact that the money will be presented. So you need to 100% make sure you're following up on that day. What I have seen is agents who use that form either the ccra, or the state form, and they put the money will be delivered within 48 hours or some other number, and then they never follow up with it. And then three, four or five weeks later, the buyer defaults, the seller wants to earnest money, and there is no money to pay him because the money has never been received. So it is incumbent upon you to follow up with the attorney to make sure that the money has been received. Another issue you have with this is that the statute 40 das 57 is solid on a pretty big issue such as if the check is made payable to the closing attorney like Blair Cato, and the check is handed to you. What is your obligations on getting that check to someone and Blair Cato and having a deposit it the statutes quite solid on that because under the statute, it assumes that your broker is holding the check in earnest money. And so you would have timeframes in which you must get that check to your broker for it to be deposited in your brokerages escrow account. But if your broker is not holding their money, there's no obligation to give a check made payable to Blair Cato to them to deposit their check because they can't deposit in their checking account. They have to deposit it, they'd have I mean, they just had to for does. So that's a problem. What I would recommend is if somebody hands you cashes, I would never take earnest money cash. If they hand you personal checks or money orders. What I would do is give those to your broker, if you can't get into the law firm in the same day given to your broker to hold in some type of safe so that money safe you don't want to leave that money sitting in your car at your house or in your in your wallet. Because if something happens that money that could become your responsibility. Blair Cato has tried to figure out a way to resolve this issue for you. And what we did is we found an app called zakum ZO cc a lm. And what zakum does for Blair Cato is it allows you as a real estate agent to take pictures of the front and the back of the check and it automatically deposits it into our trust account. So it's an app you can download on the apple Play Store on Android, just type in ZO cC AM you download it takes like 20 seconds to answer the questions, it asks you for your name, your brokerage company. And I think it asks for your license number, I don't really don't care about your real estate license number in it. And then that gets you set up and you have to set a pin number, then when a client hands you a check, you can sign in. And then it asks you to enter in your buyers information, you know their name and property address their buying. And then you take a picture of the front and the back of the check and hit Submit it's submits it to us and gives you a notice saying hey, it's been submitted, what a lot of clients are doing is while they're getting the contract signed, they'll go ahead and get that check and then get it deposited immediately so that they have complied with their requirements under the contract. This next issue is very important because it really pertains to why we are where we are today. In relation to earnest money. I had the pleasure of trying this case before the real estate commission a little over five or six years ago. And as a result of their order at the real estate commission. It has changed how earnest money is handled through outside South Carolina and at the time of this hearing, I told him that it was going to be a fiasco, if they ruled in the manner which I felt they were going to rule and unfortunately they did and now we have this fiasco of earnest money before us. Now before I tell you about this case, let me tell you a little bit about the statute in South Carolina in order to release earnest money when a contract falls through df T's. The state statute says this, if a dispute concerning the entitlement to and the disposition of trust funds arises between a buyer and a seller. And the dispute is not resolved by reasonable interpretation of the contract by the parties of the key to the contract. The dispute must be held in a trust account until the dispute is resolved by either a written agreement which directs the disposition of the money signed by all parties claiming an interest in the money be must be separate form of the contract. So you can't put that in the contract upfront. Number two filing of an interpleader number three, a court order and number four voluntary mediation, there are two triggering things number on is a dispute has to ar se first. So if earnest mone is being held and there's no ispute meaning that neith r party is claiming a dispute, ou just can't get in touch with one we have this happen all the time, where a buyer will s gn a contract, not close di appear, you can't find them, they may have moved out Ohio or wherever. And there's no disput that the seller is entitled o the money, but the buyer is no here to be found. So we do 't have a dispute. You still c n't release earnest money under he new scenario. But So numb r one, you got to have a di pute number two, it says the ispute is not resolved by rea onable interpretation of the ontract. Now I've been on the co tract committee at the Central arolina realtors Association f r about 1314 years now, I thi k 14 years. And one of th things we put in the contract w s directions to the court, whe event A happened then earn st money would be released to buyer or seller. So it was uite evident as to where ea nest money was. So there would be no other interpretation ot er than what was intended. o the case before the c urt revolved around these fact buyer and seller into a contrac contract allows a 10 day due d ligence period for the buyer o do any inspections they wan whatsoever. And within that 10 day period, they have the right to cancel the transaction for any reason or no reason whatsoever. And during that 10 days, if they cancel, then the contract is null and void and they basically get their earnest money back. quite clear. No ifs, ands or buts about it. We've been using that contract in Columbia, South Carolina since I think about 2006 or 2008. With that language in there, so this there's no dispute as to what it means. So in our situation buyer about three days into the transaction, went to the house inspected it, there was a musty smell in the basement, the seller told them they were gonna fix anything, don't even submit a repair list. So the buyer under the contract terminated the contract during the due diligence provision, which was there right, the broker released the earnest money because there's no other reasonable interpretation of the contract. The contract is super, super clear that if the buyer terminates the contract, and during due diligence, the money goes back to the buyer. There's no dispute. So after the money was released, the seller who happened to be a lawyer filed a grievance against the broker saying they couldn't release the money without a signed written agreement, which is not true. The case should have been dismissed and every been taken up to the commission, but for some reason the commission wanted to hear it. And when I went before the commission. A d at that time, I told them, th t what could happen is a a y seller who agreed to releas earnest money was a fool, beca se they could use it t basically extract revenge on t e buyer. So for instance, let' say that Walmart comes i to buy a piece of property, an they have a due diligence peri d, which is common for comme cial properties. And their due iligence period, say it's ni e months Well, during the nine onth period, they determin d that the traffic flow pat erns aren't going to work. Ther 's enough rooftops and rooftops and the area to service to almart, so they decided to canc l the contract and receive a re urn of let's say, $100,00 on its money, if you're th seller, all you need to do now ame now, I don't agree. Becaus now what Walmart would have to do in that situation was either file a lawsuit agains you to get their money back, r trying to figure out some type of settlement. So it allows the seller to basically extort money, take that on a residenti l loan basis, it's the same thi g. $400,000 house $4,000 ea nest money put down buyer righ fully terminates the contract, t e seller says, I'm not signing the release, I want the money f r no reason they have no lega right to the money, and now th y're extorting the buyer f r the money. The problem wit this is typically the mon y that buyers put dow is all the money they have for ownpayment. So when this d al falls through, and they go to buy another house, they don' have any more earnest money t put down. So the seller is rea ly squeezing them for this e rnest money, which is his ole. So as a result of this ruli g by the real estate commiss on, I told them after hearing hat what would happen is real state agents would no longer b holding earnest money, they'd be ditching that left and rig t. And as a result, that's ex ctly what's happened today. So based on this ruling, if y u are a real estate agency hol ing earnest money, then you may not release that earnest money unless you have a sig ed release or a court order. T ere's no other way you're gon a be able to release it exce t for maybe the mediation f the site, but that's g ing to result in a sudden rel ase. So basically, it's a sign elease or a court order. So wit out those don't ever, ever, ver release earnest money ecause if you do based on this ase, and there's terrible uling by the real estate commiss on, you're going to get nail d as a real estate agent, whic is why real estate agents are holding up money anymore. Now hat brings us to what happe s when the closing attorneys olding the money. Well, under outh Carolina law, we're not ubject to 40 dash 57. That law a plies to real estate license eas . Closing attorneys are not rea estate licensees. They a e Real Estate Attorneys first a d foremost. Even if they have real estate license. They're g verned by their law license. o at that point, what happ ns well, under South Car lina rules of Professional C nduct money that we're holding n escrow for parties may not be ispersed. When that money is in dispute, well, how do we know w ether that money is in dispute or not? Well, we don't know wh t's in dispute unless somebody s gns a releasing, it's not i dispute. So essentially, und r our court rules, all we can d is hold the earnest mone until the party sign a releas . And that's it. And I have seen attorneys around town who sign a reement saying that they have th right to make the decision o who gets the earnest money and o forth, that can't be done And I don't know why a awyer would be writing that docu ent, you can't contract around our rights and your rules of rofessional conduct. So under th current rules of conduct, you an't get that done. Now, the l st issue issue for is what hap ens if you're holding artists m ney for a party, before they e en sign a contract, and they ever can enter into a contr ct somebody? Well, you can s gn release that earnest mone because there's no other pa ty to release it. So if you client gives you $1,000 as ea nest money up front while they're looking for a house, you can release that money without any sign release. The other issue that you can see issue number five, is their client provides earnest money contract terminates, and they want their earnest money back, but the closing attorney won't give it back to them. Why is that? Well, more than likely, it's because the earnest money has to clear the bank before the closing attorney can release it. So if you give me money on the first day of the month, and on the second day of the month, you terminate the contract, we have to wait 10 business days to make sure that earnest money check has cleared our bank before we cut you a check back. That also means the same thing happens on a closing that if you try to do a short closing and you give money on the first and you want to close on the fifth or the sixth, that earnest money has not cleared the bank. So the closing attorney should not do the closing because those are not good funds. So as you can see, there are quite a few issues that we just kind of scratched the surface on. I think this kind of covers the main issues that you need to be aware of. And now to our segment on your education. The South Carolina real estate commission a couple weeks ago, as I mentioned, have issued an order allowing for education to continue online by most education providers. And that's what we're doing here at Blair Cato. In fact, all of our education for 2021 will be done by zoom. And what that order was interesting to stay was they gave us that extension through June 30, meaning that all of the education providers can continue to teach online through June 30. I don't think that they believe that on June 30, it all of a sudden start teaching in person, I think what they believe by that is or what I take from that is they're not extending your date past June 30. To get your license last year, I think we went into on September 30. But this year, it's going to be June 30. Now, don't forget that you're going to have to get fingerprints done this year as well. And that's not an easy process. So there's a couple things you need to do. Number one is you need to sign up for your education. And if you are a CCR, a member Blair Cato is teaching through ccra. So you can go on our website at Blair Cato calm. And you can find where the most recent class is where you go to ccrs website and sign up there as well. If you are a member of ccra ccra is giving you that class for free. If you are not a member of ccra You can also take that class. So if you're in Charleston, Hilton Head, Greenville Spartanburg, you can still take the classes, it's just $50 for the class, first thing you need to do is sign up and get the class taken. Second thing you need to do, you're gonna need 10 hours what four hours are your core class, and then six hours elective if you are a real estate realtor, rather than you can take that realtor ethics code of ethics classroom ccra as well. There'll be another four Levy's as two hours in addition to that and get your fingerprints done. And I would go ahead and start working on that early because that will not be an easy process. And then lastly, you need to be sure to go online after all of this is done and renew your license properly. That does mean signing on to the to their website, entering in your information, pay your fee, submit it making sure you have all your education done and submitting that now I have seen a situation where that website sometimes hangs up. And people will believe that they have submitted their application for renewal of license, but they've never submitted it the button properly or the button hung up. So make sure you're getting a confirmation email. If you do not renew by June 30, you will now be practicing with lapse license. And once you get to the first of 2022. If you're still practicing without having renewing your license properly, your license now is cancelled. And you would have take over the entire classes all over again to get realizes and you certainly don't want to do that. And now our final segment today, Gary is good news only couple good things on COVID COVID numbers are going down like over 55% just last week or so. So that is certainly good news. There's an age adjusted COVID-19 mortality rate that's done by states. And in this graph, it shows that deaths per 100,000 adjusted a standard population in South Carolina ranks 26 just right there at the national average at 138 people per 100,000 people. Now in the same graph, it shows that New York City if it was a state would be your worst state at 392 deaths per 100,000. New York State is next alas New Jersey is in fact last. The best three states with the lowest death per 100 1000s was Vermont, Hawaii and Maine Now if you're looking at straight not adjusted numbers for South Carolina, they've had 12 172 COVID deaths per 1 million citizens, which is within a few of the number the other other rankings gave us, which is lower than the national average for the United States. This is without any lockdown. So when you compare us to Massachusetts, which has been massively locked down, there's 2057 per million. So thank you to our governor for keeping us open so that we can continue to keep our jobs. The numbers are actually half of what Massachusetts are when they've locked down. Now the media has been calling for not relaxing our restrictions once the numbers keep going down. There's a study that shows that California After finally removing their stay at home order, on January 25 of their cases have dropped in half since removing that stay at home order. There's actually some theory out there that says that the virus spreads mainly mostly at home on that you spread it to people you have close contact with at home, and that staying locked down actually reduces your ability to fight off other viruses and cold so it reduces your immunity. I think that's kind of self evident. I know that doctors and teachers seem to get sick less than us because they're usually around it more than we are now in person index by state of public schools shows South Carolina's in the highest category 80 to 100%. So what this says is South Carolina is a state is in the category of between 80 and 100% of its public students, public school students are now back in session. We're in the same highest level category with Texas and Florida, states that have less than 20% of their public school students and included California, Oregon and Washington. I think you're seeing a theme of West Coast versus south. Now Fannie Mae announced during the first month of 2021 that consumers reported significantly more positive view and home selling conditions over the previous month. That component of the Fannie Mae home purchase sentiment index jumped 16% points on net housing wire said Zillow has reported their 2021 housing forecast echoes a rapid acceleration of home value appreciation here with numbers anticipated to be even higher than in 2020. According to Zillow home value index, the company expects seasonally adjusted home values to increase 3.7% till March 21, and then 10.5% through December 2021. And lastly, mortgage rates are holding steady at 2.73% average for another week. Well, that ends our show for this week. I hope everybody enjoyed the show and got some good information about earnest money. And again, I thank you for listening to our podcast. Please like us, subscribe to us and share us. Most importantly when you are on the podcast, particularly if you're on Apple or one of those if you'll click that button and rate us five stars because five stars would be the most appropriate rating you could give us. Thanks y'all have a great week.