Earnest Money Deposits
Continuing issues

As many REALTORS® are aware, approximately 25 percent of the calls fielded on the MAR Legal Hotline relate in some way to the receipt and handling of disputes that arise over earnest money deposits. While each situation described over the Legal Hotline varies in some way, it usually relates to one of two basic issues. MAR has addressed both of these issues in an attempt to reduce the hassle members have with handling earnest money deposits.

The first type of earnest money question arises over who is entitled to an earnest money deposit after the transaction fails. In the past, a REALTOR® who was holding an earnest money deposit, which was subject to competing claims of sellers and buyers, was subject to at least the costs of litigation after he was sued for failing to release the deposit. REALTORS® were stuck between a rock and a hard place, as both MAR’s legal counsel and the Department of Labor & Economic Growth were advising them to hold disputed earnest money deposits until they received either a written release or a court order. This advice was given to protect REALTORS® from claims that the earnest money deposit had been released to the wrong party. Many REALTORS® were put in a particularly difficult situation, inasmuch as either the seller or the buyer was their client and they wished to satisfy the demands of their client by releasing the earnest money deposit to them.

This issue was addressed in the last round of revisions to the rules which govern a REALTOR®’s handling of earnest money deposits. Rule 313(6) was specifically amended to provide that any earnest money deposit held in the trust account of a broker, to which a buyer and seller have both made claim, must remain in the broker’s trust account until the issue as to who is entitled to the earnest money deposit is determined in a civil action or until the buyer and seller have agreed in writing to the disposition of the deposit. The change to this rule removed the possibility of a claim against a REALTOR® for allegedly unlawfully withholding an earnest money deposit while the dispute continued.

As is often the case with a rule change, there were unintended consequences. Some REALTORS® had established a company policy by which they would disburse earnest money deposits regardless of whether there was a dispute between the buyer and seller over who was entitled to the earnest money deposit. Presumably, this policy was based upon a determination, that in most instances, the firm was confident in its determination as to which party is entitled to the deposit. In other words, the firm believed that the practical benefits of quickly releasing the earnest money deposit outweighed the risk that the firm’s determination was incorrect. The amendment to Rule 313 prevented these REALTORS® from continuing with such an established company policy. Fortunately, another amendment obtained by MAR to the Occupational Code provides these companies with an alternative which, in essence, permits them to continue their policy. The Occupational Code was also amended to specifically permit a seller and buyer to agree in a purchase agreement that the earnest money deposit can be held by an escrowee other than a real estate broker. Thus, for example, a company could adopt a policy by which, with the agreement of the buyer and seller, the earnest money deposit would be escrowed with a title company. The title company would then be able to release the earnest money deposit without being bound by the terms of Rule 313 requiring that the deposit be held until the dispute over entitlement to the deposit was resolved in a civil action or by a written agreement of the seller and buyer.

The second type of earnest money question involves the timing of the deposit of the earnest money into the REALTOR®’s trust account. This issue first arose years ago due in large part to excellent conditions in the real estate market. The situation would arise where a buyer would make an offer on 123 Elm Street, and in conjunction with the presentation of that offer, would provide an earnest money deposit to the REALTOR® with whom the buyer was working. Then existing law required the REALTOR® to deposit the earnest money check within two (2) banking days of receipt of the earnest money deposit. The problem arose when the buyer’s offer was rejected by the sellers. Often, the buyer immediately wanted to move forward with the pursuit of another home. This was not always possible as, in these instances, the buyer’s funds for the purchase of a home were wrapped up in the earnest money check deposited in the REALTOR®’s escrow account. In some instances, the buyer’s money could not be returned to him for up to nine (9) days.

In order to address this problem, MAR sought and obtained a change to the Occupational Code, which now requires a REALTOR® to deposit an earnest money check in his escrow account within two (2) banking days after the REALTOR® receives notice that the offer to purchase has been accepted by all parties. This change was designed to permit buyers to retrieve an earnest money check from the broker prior to its deposit in the broker’s escrow account if the buyers’ offer for a home was rejected by the sellers. This would permit the buyers to immediately seek to purchase another home.

Unfortunately, this change obtained by MAR did not completely solve the problem. Assume that the buyer makes an offer to purchase 123 Elm Street on May 1. The offer is accepted on May 2, and the REALTOR® deposits the buyer’s earnest money check in his escrow account on May 4. On May 8 the buyer has an inspection performed on 123 Elm Street, which results in findings that are unacceptable to the buyer. The buyer no longer wishes to pursue the purchase of 123 Elm Street, but, instead, wants to look for another home elsewhere. The buyer and the REALTOR® assisting the buyer again find themselves in the position where it can take up to nine (9) days to clear the buyer’s money so he or she can pursue another home.

REALTORS® have developed various responses to this problem. Many of these responses appear to involve an agreement in which the buyers and sellers agree that the REALTOR® will not deposit the earnest money check in his escrow account until the inspection or some other contingency has been satisfied or waived by the buyers. As an example, the purchase agreement could provide that the REALTOR® will not be required to deposit the buyers’ earnest money check in the REALTOR®’s escrow account until the buyers provide written notice to the sellers that they are satisfied with the inspection. Unfortunately, this type of arrangement violates existing law. The law mandates that the REALTORS® deposit the earnest money check within two (2) banking days after they receive notice of acceptance of the offer. It is not within the power of the sellers and the buyers to waive this law. Presumably, for REALTORS® audited by the Department of Labor & Economic Growth, if it is determined that an earnest money deposit was not deposited within two banking days as required by law, it is not going to help the REALTOR® that the sellers and buyers had agreed that the REALTOR® could break the law. If an earnest money check hits the hands of a REALTOR®, it must be deposited into the REALTOR’S escrow account as required by law.

Some REALTORS® are dealing with this issue by offering very small earnest money deposits. Thus, presumably if a buyer has a $250 earnest money deposit tied up in his REALTOR®’s escrow account, he will have another $250 to deposit toward another home if the inspection of the first home is not satisfactory. Other REALTORS® are addressing this question by initially offering a low earnest money deposit by the buyers, e.g., $250, and then specifying in the purchase agreement that an additional earnest money deposit in a larger specified amount will be delivered to the REALTOR® after the satisfaction of a specific contingency, e.g., within two days after the buyers waive or release the inspection contingency.

MAR will continue to address these issues. Unfortunately, there is no silver bullet to kill the beast.

Referral fees: a simple answer
The MAR Legal Hotline continues to be flooded with questions as to when REALTORS® may pay a referral fee to individuals for referring a prospective buyer or seller. At one time there was a gray area on this question. No gray area exists today.

The typical caller to the MAR Hotline indicates that she wishes to do a little promoting by advertising that she will pay some amount of money to any person who refers a seller or buyer to that REALTOR®. The question is, can she offer such a promotion? The answer is a resounding “NO.” The Occupational Code specifically prohibits the payment of a fee, commission or other valuable consideration to an unlicensed person “... including payment to any person providing the names of, or any other information regarding, a potential seller or purchaser of real estate ...” There is no gray area — if the person to whom the REALTOR® wishes to pay a referral fee is unlicensed, then the fee cannot be paid.

Some REALTORS® are confused by the fact that the Occupational Code specifies that a REALTOR® can pay an unlicensed person “for the purchase of commercially prepared lists of names.” Some REALTORS® have interpreted this exception as permitting them to pay referral fees to unlicensed entities who offer them names of specific, prospective buyers over the internet. Somehow this provision is interpreted as permitting payment to an unlicensed entity under the so-called commercial list exemption. The exemption does not apply to this situation. If the unlicensed person or entity is offering the name of a specific buyer or seller over the Internet, the telephone, in a letter or by morse code, this is not payment for a commercially prepared list of names.

The commercial list exemption to the prohibition against payment of referral fees to unlicensed persons is very simple. Commercially prepared lists of names are not buyer or seller specific. As an example, a REALTOR® can purchase a commercially prepared list of all homeowners located within the northwest quadrant of the City of Detroit. Further, there are commercial list providers who would refine the list of names for persons owning property in the northwest quadrant in the city of Detroit, and establishing the list of names by categories with respect to age, income or other lawful factors. Typically, a REALTOR® purchases a commercial list in order to make a broad solicitation to persons who may wish to buy or sell through him. If a REALTOR® is paying an unlicensed person for the name of a specific person as a potential seller or buyer, she is not purchasing a name under the commercial list exemption.

In summary, payment of referral fees to unlicensed persons for the names of specific buyers or sellers is forbidden. It is just that simple.

There is also confusion among some REALTORS® as to how the prohibition against payment of referral fees to unlicensed persons affects a REALTOR®’s ability to offer certain types of inducements to buyers and sellers. A common example is a promotion by a REALTOR® who offers to make a charitable donation in a specific amount, at the choice of a buyer, if the buyer purchases a home through the REALTOR®. Some REALTORS® challenge other REALTORS® who make these types of promotions, claiming that they are violating the law against payment of referral fees to unlicensed persons. This is simply not the case. The REALTOR® in this example is not paying a referral fee to anyone. Instead, the REALTOR® is simply paying some amount of consideration to a charity designated by the buyer. Obviously, the charity did not refer the buyer to the REALTOR®. There is simply no referral involved in this transaction.

There is a certain type of charitable promotion program which could result in a claim that the REALTOR® was paying an unlawful referral fee. An example of this situation would be where a REALTOR® advertises that she will make a charitable contribution of a specific amount to a specific charitable institution if a person buys or sells through her. The practical result of such an arrangement could be that the specifically named charity, e.g., Ace Charity, will begin to refer persons to the REALTOR®. In this situation, the Department of Labor & Economic Growth could find that there is a specific referral arrangement between the REALTOR® and the specific charity, and that the payment of the donation constitutes the payment of a referral fee by the REALTOR®. The risk of the Department making such a finding would, of course, be heightened if, in fact, there was some direct agreement or relationship between the REALTOR® and Ace Charity for payment of donations by the REALTOR® to Ace Charity in consideration of Ace Charity referring its members or patrons to the REALTOR®. Obviously, any risk in this type of situation could be avoided by having the REALTOR® offer a menu of charities from which a buyer or seller working through her can direct the donation. As an example, the REALTOR® could list several different charitable organizations, and a buyer or seller working through her would select one of those charities for a donation. This arrangement would certainly reduce the possibility of any claim that a donation was being made in exchange for specific referrals from a charitable organization.