Before Signing a Contract a Seller Should Set Out to Obtain the Maximum Escrow Possible

Friday, February 17, 2017, 2:57PM

By: Keith Gordon

If a buyer is unable to close a deal they are often given back the escrow funds as there are contingencies built into contracts for inspections, financing, attorney review and appraisal.  Each of these contingencies is uniformly responsible for causing a deal to fail. The buyer is always favored above the seller in each of these cases becasue the law is protecting the buyers, who principally drive the transaction.  FAR and FAR/BAR contracts significantly favor the buyer, unless the buyer is paying with cash and then the seller is in a stronger position because, after inspections, escrow deposits are technically non-refundable. Providing that the buyer stays within the timeline specified within the contract, they will and do typically get the escrow returned for a failed deal. That doesn’t mean the seller can’t challenge who gets the escrow but taking an escrow dispute to court costs about $1500 and judges typically sympathize with a buyer.  

Although, when you are in the last few days prior to closing, it becomes less evident who would receive the escrow. For instance, perhaps a buyer opts to cancel a deal; or they are unable to secure financing or their loan commitment pledge is postponed or maybe the loan commitment was conditioned on some event.  It is in these instances where a seller needs to place as much pressure as they can on their buyer and a large escrow helps the seller keep the buyer in the deal.  

Let’s examine what could potentially go wrong during those final few days. A new issue is found while the buyer is on their walk-through inspection or perhaps the buyer changed employers after their pre-approval letter was issued and didn't inform their mortgage broker.  Perhaps the HVAC stopped working since the last inspection or there was a tile in the kitchen that has been damaged since the last time they saw the property. In this event, a seller often offers to extend the closing deadline, for free, to a buyer because they want the deal to close. A buyer may then say, no; stating that they desire a “pre-closing occupancy agreement’” or they want out and their escrow returned. Fundamentally, the buyer is causing their issue to become the seller’s issue.  A substantial escrow is a powerful motivator for a buyer to commit to closing in this scenario.  If the escrow is too small and of no real concern to the buyer, they very often will just leave the deal.

A deal can collapse for a myriad of reasons related to the buyer.  One weapon in the seller’s arsenal when a buyer breaches a contract is the escrow deposit.  On the flip side, it could actually be welcomed by a seller who has a backup offer who desires to “breach-out” (terminate contract) and take a better buyer or higher offer. 

When representing a seller, agents should take advantage of every possible protection since most contracts favor buyers.  Agents who represent sellers need to think outside the box and be proactive.  Asking for the maximum escrow possible can be a valuable tool during negotiations.