Jay J. Spadinger, R - Jay's Blog

Top 5 Escrow Nightmares & How to Avoid Them
Posted: 10:03 PM, Feb. 14, 2007

Top 5 Escrow Nightmares and How to Avoid Them
esp. for the State of Hawaii

When escrow is opened and the Escrow Instructions are signed by:

1. The Escrow Company

2. The Sellers

3. The Buyers

    The Escrow Instructions then become, in fact, an Employment Contract between all parties involved, spelling out everyone’s duties and responsibilities. From that point on, the Escrow Company cannot legally do anything on behalf of either the Sellers or the Buyers without the written permission of both – because the Escrow Company is there to act as a fiduciary for both sides.

    A few key points to remember based on the above is that, regardless of the wording in our contracts (for example, the Sales Contract, the Seller’s Disclosure Statement, etc.), all parties to the Escrow Instructions are bound by the terms & conditions of the Escrow Instructions. These instructions can even, in some cases, supersede terms outlined in the contract documents.

Some of the most common escrow nightmares are:

1. Seller is unhappy with the Buyer for a perceived or actual contract violation on the Buyer’s part. Seller desires to cancel the contract, and Seller requests the Escrow Company release the Buyer’s earnest money to the Seller as liquidated damages.

2. Buyer is unhappy with the Seller for a perceived or actual contract violation on the Seller’s part. Buyer desires to cancel the contract and Buyer requests the return of the Buyer’s earnest money deposit from the Escrow Company.

3. Buyer does not like the contents of the Seller’s Real Property Disclosure Statement and, per the provisions of the ‘Disclosure’ document, Buyer rescinds the contract and requests that all funds be “immediately returned to Buyer” by the Escrow Company.

4. Buyer does not like the contents of the Seller’s Leasehold Disclosure Documents and, per the provisions of the Residential Leasehold Property Addendum; Buyer rejects the Lease and Disclosure, and requests that all of Buyer’s deposits be refunded by the Escrow Company.

    The Escrow Company, however, cannot legally release the Buyer’s earnest money deposit to anyone in the above scenarios without the written permission of both Seller & Buyer as per the written Escrow Instructions. If a dispute arises, the funds will sit in Escrow – for up to seven years - until the Seller & Buyer come to a written agreement as to the disposition of the funds, OR the Escrow Company turns the funds over to the court for Inter-Pleader Action.

5. A Power of Attorney (POA) can be a valuable and useful document and sometimes is necessary for a successful closing to occur. The problem: not all POAs can be recorded by all Escrows in Hawaii.

     If your client plans on using a POA, have your Escrow Officer inspect it early on in the transaction. An original, signed POA is usually required. Have the Escrow Company ensure that the POA is recordable in the State of Hawaii. Too often your client will only have a fax or a copy of the POA which cannot be recorded, or the POA will be in a form or format not recordable in Hawaii.

     If necessary, the Escrow Office will give your client a POA document which can be sent to the absent Principal for signature, notarization and return in time for the closing. Best to take action early to preclude problems at closing.

Things to Remember About Opening Escrow

    Your client will probably call you shortly after opening escrow with questions about the huge envelope containing page after page of fine-print undecipherable legalize they’ve just received from the Escrow Company. There is a tendency among Agents to say, “Those are only the Escrow Instructions - don’t worry about it! It’s just “boiler-plate” language to keep the lawyers happy! Nothing to worry about - sign here, initial here…..”

    It’s your responsibility to your clients, representing their best interests as their fiduciary agent, to thoroughly explain that the Escrow Instructions are a binding three-party employment contract, and to be sure that the client understands the implications of all of those instructions and the potential “nightmares” outlined above, before they sign the documents and return them to the Escrow Company.

    We are members of the Real Estate Profession; however, we must also be Educators about the processes of Escrow in particular, and real estate in general if we are to take optimum care of our clients and uphold our fiduciary responsibilities to them.

I hope you have found this information helpful. Until next time – take good care!

Jay J. Spadinger, REALTOR, BIC, ABR
Hawaii State Educator
Rainbow Properties
Akahi Real Estate Network, LLC
www.rainbowproperties.com
www.jayhawaii.com

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February 2007