When escrow accounts should be interest-bearing

Brokers of record have a wide range of responsibilities, some of the most serious of which involve escrowed money. Regardless of how it is described – hand money, good faith money, down money – it is money belonging to another. The Rules and Regulations interpreting the broker’s responsibility are fairly strict, fairly broad and are closely scrutinized when potential violations are brought to the attention of the Real Estate Commission. There are so many mandates and directives that cannot be waived; does the broker have any discretion with these accounts?

Not much. One of the lesser known and lesser used provisions of the escrow requirements is the interest-bearing account. In times past, real estate transactions (especially residential transactions) progressed from agreement to settlement in a relatively short period of time. Rarely did the residential transaction take more than 60 days to complete. Commercial deals are less capable of broad generalizations because each deal is so unique but was it commonplace for a deal to take more than six months to finalize?

In today’s market, however, things are different. Short sales are far more common today than at any time in recent memory and these deals can take inordinately long periods of time to consummate. Some residential deals will involve sizeable deposits and most commercial transactions will as well. Although interest rates are nothing to get excited over, wouldn’t your buyer prefer to have his deposit money earn something – anything – while it is sitting in escrow?

First and foremost, there is no requirement that escrowed money be placed in an interest-bearing account, nor is there any prohibition against it. For those transactions in which you anticipate the “hand” money to be held longer than six months, the Real Estate Commission encourages brokers to deposit the money into an interest-bearing account. Because this falls within the broker’s discretion, when long-term deposits are expected, talk with your client about whether they want the money to be held in an interest-bearing account. There may be financial reasons why a client would prefer that not happen so you certainly want the client’s input. This is also something that you will need to discuss with the broker holding the money (assuming it’s not you) at the beginning of the negotiations. If that broker is not willing to deposit the money into an interest-bearing account then perhaps it is in your client’s best interest for you to hold the “hand” money. Although local practice may suggest that a listing broker holds deposits, there is no corresponding legal requirement. 

As the market changes so too will your practices. This is just one more tool to carry with you to improve the level of service you can offer your clients.