Escrow, escrow, who's
got the escrow...
After receiving a few emails regarding escrow deposits, I
thought I would address this for you.
When you are attempting to purchase a business, you usually
put up an 'earnest money deposit' to be placed in escrow. The
deposit money does not belong to the seller. The last person
you want to give it to, to hold onto until closing (settlement,
passing of papers) is the seller! If the deal sours and the seller
has already used the money ("Oh, he told you it would
go into a special fund? It did...") it may be extremely
difficult to get your deposit back. Perhaps in the seller's mind
he thought it was his to keep.
Give it to a third party to hold! If you are buying
a FSBO (for sale by owner) give it to an escrow agent, escrow
title company, attorney, or you can go to the bank and set up
a special escrow account. (This may vary by state law. I just
tried to put a deposit into it's own escrow account and the bank
will not let 'escrow' be on the account as it implied they were
the escrow agent and they want no liability or part of a dispute.)
If you are using a state licensed broker, the brokerage is
very specifically regulated as to what they can and cannot do
with this deposit money. Most licensed brokers have a separate
account for escrow deposits only. They may not commingle those
funds with their working account. They are subject to spot inspections
without notice from the state. (If they don't have a real estate
broker's license, they do not have to worry. You do...) If there
is a dispute over the deposit, the escrow agent may not be able
to release the funds to anyone without consent from all parties.
In most instances the escrow is placed in a 'non-interest-bearing'
account. The escrow agent does not earn interest, the seller
does not and the buyer does not. Just the bank! If it is a sizable
deposit you may ask to have it placed in it's own escrow account
and pay for the costs associated to set that up. The costs could
be $20-200 depending on bank and state. But if you are putting
up $50,000 for 3-6 months until closing, I too would want the
I worked for one company that had their escrow account set
up to bear interest. (This was disclosed in all documents signed
by buyers and sellers.) The interest was paid every year to Muscular
Dystrophy or the American Cancer Society. It sure felt nice to
be part of a company that was able to hand over 10-20 thousand
dollars in 'found' money to a great cause. I also support the
Animal Shelters and Humane Society so I would be happy to put
the interest there.
As a buyer you have the right to ask where the money will
be held, the name of the bank and the account number. It's no
big secret! If someone does not want to disclose that or if you
are the least bit uneasy, pay $1,000 and have an attorney hold
the deposit money. Fifteen years ago when the boat brokerage
industry was unregulated in Florida, I gave a boat broker a ten
thousand dollar bank check on an offer I made on a boat. The
offer was not accepted and I asked for my deposit back. It took
six weeks... the first check I was given bounced. It was not
drawn on an escrow account but a general business account. A
few war stories like that is what caused regulation in many industries.
The above comments are my opinion. For local custom and law,
consult with an attorney or call your State Attorney General's
Business Buyer Resource Center - "Learn 100s of tips, strategies
and techniques to help you find and buy the right business".