We all know the importance of placing deposit monies in an escrow account. Most of us know about the “next business day” rule. And while most of us know that a deposit check can be held until the next business day following seller’s acceptance of an offer, few know why. If you are weak on anything I’ve referenced above, I suggest that you turn to the Rules and Regulations of the State Real Estate Commission, beginning at Section 35.321. Here you will find what you need to know about your responsibility in handling “money belonging to another.”
So here’s a test question: Must you deposit a lot reservation fee in an escrow account and, if so, when? I’m talking about the check a buyer gives you to temporarily reserve a building lot while the buyer and builder negotiate a new construction contract. While lot reservations may be paid directly to a builder, many times the builder wants nothing to do with managing these funds and expects the broker to hold them. And usually these funds are fully refundable if the buyer walks away within a limited period of time. I know brokers who have expressed to me their preference to hold these checks rather than deposit them. For one thing, there’s a fair percentage of buyers who change their mind about new construction and who want their reservation fees returned. If the buyer’s reservation fee is in the form of a check that’s been deposited, it may take weeks for that check to clear. If the check hasn’t yet cleared, you run the risk that it may never clear though the refund you’ve given the buyer will!
A big question is why are lot reservation fees required? If the reservation check is not deposited and the buyer stops payment there is no benefit to having it. And if it is refundable, it’s not as though you’re really holding anything at all! Why not just give the buyer a 10-day lot reservation in exchange for their promise to negotiate the purchase of a new home with a builder? I presume there is some psychological benefit to having the buyer post a check despite the fact that it’s not particularly good collateral when held in a desk drawer.
Another problem, a bigger problem, with the uncashed reservation check is that it is … a violation of the Rules and Regulations! If you read the sections of the Rules that I have cited above, you know that when a broker receives money belonging to another, that money (check) must go into an escrow account within the next business day. The only exception is for deposits that accompany a buyer’s offer or a tenant’s offer to lease. In those cases, the duty to deposit the funds in escrow extends to one day after the execution of the lease or purchase agreement. No exception is found for lot deposits or anything else.
While holding lot deposits may make sense, you’ve probably got a problem if you’re doing so. If your builder is willing to hold these checks, and they are made payable to the builder and not to your broker, you are not likely violating any Rule. You would want to make clear that the buyer’s lot reservation will be paid to and held by the builder, despite how obvious that would seem.
I hope this helps. As always, I’m interested in your thoughts on the matter.