From Disputes over Earnest Money to the Settlement Statement and Beyond

Lines 89-91 of the AAR Residential Resale Real Estate Purchase Contract (AAR Resale Contract) read:  “The Escrow Company employed by the parties to carry out the terms of this Contract shall be:________________ “ESCROW/TITLE COMPANY”

In the above contract language, you see the words ESCROW/TITLE COMPANY.  In Arizona, most of the time the escrow and title services are completed by the same company.  Do you know which Arizona government agencies regulate the fees that escrow/title companies may charge in Arizona?  Escrow rates are regulated by the Arizona Department of Financial Institutions, while title insurance rates are regulated by the Arizona Department of Insurance.  Both of these government bodies periodically audit the files of escrow/title companies in Arizona to see if they are complying with state regulations.  So when a real estate agent asks an escrow company to reduce their fees on a short sale, they may not be able to because of state regulation.

2. What Does the AAR Resale Contract Say About Escrow? 

Line 89 of the AAR Resale Contract reads, “This Contract shall be used as escrow instructions.”  So the AAR Resale Contract is the escrow instructions.  Escrow instructions instruct the escrow company how to carry out the terms and conditions of the contract.  Be sure to give escrow a copy of any addenda that the buyer and seller execute during the transaction because addenda become part of the contract, and the contract is the escrow instructions.

3.  What Does the AAR Resale Contract Say about the Commitment for Title Insurance?

When escrow officers receive an executed purchase contract, they open escrow using the information from the contract.  They then order the Commitment for Title Insurance from their title department.  When the Commitment for Title Insurance is completed, it is sent out.  This document is the escrow/title company’s commitment to insure the title of the property subject to exceptions and requirements listed in the commitment.  Lines 98-99 of the contract read: “Buyer shall have five (5) days after receipt of the Title Commitment and after receipt of notice of any subsequent exceptions to provide notice to Seller of any items disapproved.”

4. What Does the AAR Resale Contract Say about Escrow Disputes Between the Buyer and Seller? Let’s look at an example of something the buyer may disapprove that may be listed in the commitment:  Your buyer wants to purchase a home that does not have a pool but has a large backyard because they want to put in a large custom pool.  You show your buyer a home with a large backyard and no pool, you write a contract and the contract gets accepted.  But your buyer may not be able to put in a pool.  Why?  There could be a recorded easement listed in the commitment that will not allow for a pool.  This easement would be considered an exceptionin the commitment.   Better to read the commitment within the allowed five days of receiving it and cancel the contract, rather then discovering the exception at a later date.  Legend has it that an out-of-state buyer did purchase a very expensive property with a large backyard, and when they went to put in a pool, they could not because of an easement exceptionin the title policy.

Lines 116-118 read: “Release of Earnest Money: In the event of a dispute between Buyer and Seller regarding any Earnest Money deposited with Escrow Company, Buyer and Seller authorize Escrow Company to release Earnest Money pursuant to the terms and conditions of this Contract in its sole and absolute discretion.”  In a dispute, the AAR Resale Contract gives the escrow company decision-making power over who will receive the earnest money.

If a dispute arises, escrow will review the reasons from both parties as to why they should receive the earnest money.   Escrow will ask for documentation of the delivery and receipt of notices.  Lines 348-351 of the contract address notices. Escrow will attempt to determine if these reasons line up with the AAR Resale Contract.  To protect your client, it is important for new agents to understand how the nine sections of the AAR Resale Contract work, how to write clear and concise contract language, when and how to execute a cure period notice, and how to document their file. 

Occasionally the decision on who should receive the earnest money is difficult to make.  When this happens, escrow may suggest mutual written instructions executed by both parties defining how to disburse the earnest money or the escrow company may suggest the buyer and seller go to mediation per lines 283-292 of the contract.

5. Why Should New Agents Become Familiar with the Settlement Statement or HUD-1?

The escrow officer completes the HUD-1, which shows the costs associated with the closing of a resale transaction.  It shows how much money the buyer will need to bring in to close escrow.  It shows how much money the seller will receive.  It shows how much the short sale lender will net.  Information to complete the HUD-1 comes from the AAR Resale Contract, from the lender instructions if the buyer is getting a loan, and from the filed escrow and title insurance rates.  If it is a short sale, escrow needs a copy of the Short Sale Agreement Notice from the lender.=

Sometimes there are conflicting instructions.  For example, let’s say the AAR Resale Contract has the seller paying $7,500 of the buyer’s closing costs and prepaids, but the lender instructions will only allow the seller to pay up to $5,000.  When a conflict like this occurs, escrow will work to resolve the situation and often needs the help of the real estate agent and the lender.