Question: I had a contract to sell my Maryland home and the buyers provided a $500 earnest deposit, which was held by my broker. Less than a week before the scheduled settlement date, the buyers backed out of the contract. They claim they could not obtain financing. However, I have documentation from the buyer's loan officer that their loan application was closed for imcompleteness because the buyers did not supply all the necessary documentation needed for loan approval.

My broker says that the buyers violated the contract, since they did not diligently pursue the loan application; she believes I should get the deposit money. However, our contract requires that an "Agreement of Release" be signed by both parties before the deposit money can be released. Although letters have been sent to those buyers asking them to sign the release, they have ignored the request.

It has been over a year since the contract was broken. The agent is still holding the money, and now seems disinterested in doing anything more to resolve this. Although this is not a lot of money, I would like to know how such issues are resolved.

Answer: There is one important lesson to be learned from your experience: the earnest money deposit which a potential purchaser puts down when the contract is signed should be as large as possible. As a seller, you want to make sure that your potential buyers will think long and hard before they walk away from a large deposit.

Your broker is correct; they hold the $500 in escrow, pursuant to the terms of your real estate contract. As an escrow holder, they cannot release the money based on a unilateral request from either the seller or the buyer. There are only two ways that an escrow holder can legally and ethically release funds from escrow: written authorization from all parties, or when a Court of Law issues an Order directing the disposition of the escrowed funds.

You believe you are right, and you probably are. If the buyers did not diligently pursue their loan application, they most likely decided to walk away from the contract -- and from their $500. While no one wants to lose any money, the amount of the deposit is so small that your buyers probably decided it was not worth pursuing its return.

However, in many cases, there are two sides to each story. Both buyer and seller believe that they have honored all of the terms of the contract, and since settlement did not take place, both believe that they are entitled to the earnest money deposit.

Now, we have a controversy. Both buyer and seller demand that the escrow agent -- usually the real estate broker -- give them the money.

But since the broker is holding the money in escrow, he cannot release the funds without specific authorization from both sides (or Court Order) -- even if the broker believes that one of the parties breached the contract and that the other is entitled to the deposit.

Generally there is a statute of limitations. Check the rules in your state. For instance, if there is a three-year statute of limitations in your situation you would have two more years in which to resolve the dispute or file a lawsuit against your buyer. Otherwise, you will have lost all rights to claim the funds.

Read your contract carefully. Most modern real estate contracts contain language to the effect that if one party refuses to sign a release, and if a Court of Law determines that the party should have signed the release, the other side will not only get a judgment authorizing the release of the earnest money deposit but will also be able to collect reasonable attorneys fees from the losing party.

In the new Regional Sales Contract used throughout the Washington Metropolitan area, the following language can be found in the paragraph entitled "Default":

If either Seller or Purchaser refuses to execute a release of Deposit when requested to do so in writing and a court finds that they should have executed the agreement, the party who so refused to execute a release of Deposit will pay the expenses, including, without limitation, reasonable attorneys fees, incurred by the other party in the litigation.

This is known as the "prevailing party" concept.

Thus, if this -- or similar -- language can be found in your contract, you will probably find an attorney who will be willing to take on your case. Alternatively, you have the right to file a suit in the Small Claims branch of your local Court. Go down to the Courthouse and talk with one of the clerks. Generally, they will be very helpful, and will give you the forms and explain the process to you.

File your lawsuit against your potential purchaser. Although you are required to follow the various Rules of the Court, in many instances the Judge will assist you in pursuing your case -- so long as you have the proper documentation. You will need to present proof that the purchasers did not diligently pursue the loan. The best proof will be the direct testimony of the loan officer. However, I suspect that unless he gets paid for his appearance, he will be reluctant to testify. At the very least, have an affidavit prepared by that loan officer, which will be signed and notarized, explaining the process. If the loan officer has correspondence to the buyers advising them that they have not completed the loan application, this would be excellent evidence to be submitted to the Judge.

Once you file suit, your buyers (the Defendants) will have to be served with the legal papers. Talk to the Clerk of Court to find out how this process works. In some jurisdictions, the Court serves the Defendant; in other jurisdictions, the burden is on the Plaintiff to complete service.

I suspect that once the lawsuit has been filed and served, the Defendants will probably not show up in Court. If that happens, the Judge will grant you a judgment by default. Once you have a judgment, the escrow holder will be able to release the earnest money to you.

There is one additional way in which to get the deposit back, if the real estate broker will agree to cooperate. They can file a lawsuit, called an "interpleader", whereby they sue both buyer and seller and ask the Court to make a decision. Basically, the real estate company tells the Court: "we are innocent stakeholders, and do not want to hold this money indefinitely. Judge, here's the money; please decide who should get it." It is a lot of work, and you may decide not to pursue any of this for the $500. But hopefully you have learned a valuable lesson. Next time, get a larger deposit.

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