Many questions are asked about how and when to disburse earnest money. The first section of  questions and answers in this article highlight disbursement alternatives while the second section on the next page includes frequently asked questions about opening and closing trust accounts.

Attorney opinion

The broker has a short sale listing with an accepted offer. The seller moved; the broker believes the seller moved across the country. The bank did not approve the short sale, and the closing date passed three months ago. The buyer demands the earnest money. Can the broker just disburse it to the buyer?  

No, the listing broker should not release earnest money without proper authority. The parties may indicate to whom the money should be disbursed in a WB-45 Cancellation Agreement and Mutual Release (CAMR) or another written directive. If the parties won’t sign a CAMR, provide written instructions, or cannot be located, the broker may disburse by following the procedures set forth in the offer to purchase and Wis. Admin. Code § REEB 18.09(1).

One alternative described in the offer is to obtain an opinion from an impartial attorney regarding who should receive the earnest money. There are two timelines to keep in mind for this option: first, the broker cannot disburse until 60 days after the scheduled closing date; and second, the broker must give 30 days advance written notice by certified mail to the parties before disbursing the funds. If the broker chooses this disbursement method, the broker may deduct up to $250 from the earnest money for the legal fees involved.

Party initiates small claims action

The parties have a dispute about the offer, and the buyer wants the broker to release earnest money, but the seller will not sign a CAMR. Can the buyer pursue small claims for the earnest money?  

Yes. A broker may disburse the earnest money as directed by the order of a court hearing the parties’ earnest money dispute. Under the § REEB 18.09(1)(d) disbursement rule, either of the parties may go to court at any time, and the broker is allowed to disburse pursuant to the order of the small claims court whenever so ordered. For the court to have proper jurisdiction to order the broker to disburse, the broker would be made a party to the lawsuit as a defendant.

Broker initiates small claims action

The transaction was scheduled to close in July. Both parties are working with legal counsel, but neither has initiated a small claims action for the earnest money. Can the listing broker go to court to decide how to disburse? 

The listing broker may choose to initiate a small claims action, known as an “interpleader action,” to determine who receives the earnest money. An interpleader action is a lawsuit brought by the custodian of money or property when he or she is not certain who is rightfully entitled to the funds or property. In an earnest money situation, the suit is filed by the broker who is a neutral stakeholder and unable to render the legal judgment regarding who is entitled to the earnest money. The interpleader action names the competing parties, which are usually the seller and the buyer, and forces them to litigate their respective claims. The broker normally participates in the action only to the extent of starting the action and paying the earnest money into the court or as the court directs. The broker should not initiate an interpleader action until 60 days after the scheduled closing date unless specifically ordered by the court to do so at an earlier time. The broker may, however, consult with his or her attorney and prepare the paperwork necessary for an interpleader action before the 60 days has passed. Costs incurred, such as working with legal counsel and filing the action, may be covered by deducting up to $250 of the earnest money per the terms of the offer.

Wait or do nothing?

What happens if the broker does not hire the attorney per the offer and neither party initiates legal action?  

The broker is not obligated to resolve the parties’ earnest money dispute and may simply allow the money to remain in the broker’s trust account. The broker is to remain impartial and allow the parties to resolve their differences.

If the parties fail to take action, the money will be considered abandoned after five years per Wis. Stat. Chapter 177. Per Wis. Stat. § 177.12, any intangible property held in a fiduciary capacity, including earnest money or trust fund deposits, will be considered abandoned after five years unless the owner takes certain steps to retrieve the funds. During the five-year period, the broker will make reasonable efforts to contact the parties and document those efforts in the transaction file for the purposes of the unclaimed funds rules. After the five years, the broker will work with the Office of the State Treasurer to follow the unclaimed property procedures. The broker may submit the names of all the buyers and sellers to the Treasurer for publishing. Even after the five years, the broker is not obligated to determine whether the buyer or seller has the right to the funds.

Third-party payors

The buyer’s mother is going to pay the earnest money for the transaction. What happens if the deal fails and the seller makes no claim to the earnest money? Who gets the earnest money — the buyer or the mother who paid it?  

The answer depends on whether or not there is an accepted offer. If there was an offer that was not accepted, § REEB 18.09(1)(a) and the offer indicates the funds should be returned to the payor, that is, the person who paid them. In this case, that would be the mother of the buyer. If, on the other hand, there was an accepted offer and the buyer and seller agree to cancel the offer, the disbursement will be directed in the CAMR. Therefore it is possible the broker makes out a check to a person who did not pay the earnest money. This is why cautionary language contained in the offer suggests “If someone other than Buyer makes payment of earnest money, consider a special disbursement agreement.”

Trust account FAQs

The broker decided to open her own company. Is she required to have a trust account? If there is no trust account, where is the earnest money held?  

Wis. Admin. Code § REEB 18.033(1) does not require a broker to open a trust account unless the broker receives trust funds. If a broker does not have a trust account, this information will need to be disclosed first to the seller and then to any buyer drafting an offer because all offers will need to be modified. The offer provides that the earnest money will be paid to and held by the listing broker, the buyer’s agent if the property is not listed or the seller’s account if no broker is involved. Therefore, parties must negotiate where to hold earnest money if the listing broker chooses not to have a trust account. There are several options: the title company, the other broker, if any, an attorney, or the seller, to name a few. Offers to purchase will need to be modified to reflect where the money will be held, and earnest money and other checks would need to be made payable accordingly.

How many trust accounts can a broker have? 

The broker may have as many trust accounts as the broker deems necessary based on the services the broker provides. For example, the broker may open a trust account for each type of real estate activity that the broker engages in, such as sales and property management. Likewise, if the broker has more than one office location, there could be a trust account for each of the offices.

The broker is planning a trip and wants to know who can sign for the broker on the trust account while he is gone?  

Wis. Admin. Code § REEB 18.04 provides that a broker may authorize any person to sign real estate trust account checks provided the person is at least 18 years of age. The Administrative Code does not require the person to hold a real estate license.

How long does the broker have to deposit the earnest money?  

Wis. Admin. Code § REEB 18.031 provides that a broker must deposit all real estate trust funds received by the agent or the broker in the real estate trust account within 48 hours of receipt of the funds. The 48 hours are measured from the time that the licensee receives the check — not from the date of the check. If the funds are received on a day prior to a holiday or another day in which banks are closed, the deposit must be made within the next two business days.

Do you have to notify the DSPS of a closed account? If so, how? 

Yes, you must notify the Department of Safety and Professional Services of a closed account. Wis. Admin. Code § REEB 18.037 indicates that when closing a real estate trust account, a broker may inform the board by letter. There is no form to notify the DSPS of a closed trust account. The broker can send written notice, including the name of the broker or the business entity, the trust account name, name of the bank and account number, to the Department of Safety and Professional Services, Division of Professional Credential Processing, 1400 E. Washington Ave., P.O. Box 8935, Madison, Wisconsin 53708.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.