Wiring deposit funds before purchase agreement signed?

Question

We recently had a seller request we wire the deposit funds into escrow before they signed the purchase agreements. We backed out on this request. The escrow agent said that this was common practice but we have never heard of it. Is this true, that such a thing is now commonly done?

J Scott · Answer

You should have responded, "Okay, but I'll need the sellers to turn over the keys to the property a week before closing," and see if they thought that was reasonable...  :D

Sometimes asset managers selling REOs will require EM at the time of verbal agreement, but for a private sale, I see no reason to provide EM before the contract is signed.  How do you know the seller will even sign the contract and what instructions are you including with the escrow money if there is no contract?

J Scott · Answer

What exactly does that mean?

Do they demand you get your title search/insurance through their company?  Do they demand you hold the EM in their escrow company?  Do they demand that their attorney close the deal?  All of the above?

In general, if the other party is making demands that you're not comfortable with (or you feel is putting you at risk), you should either demand changes or walk.

In this specific case, there is no reason why a seller should require you to use their escrow company (at least not without more explanation of why); without additional explanation or compromise, I'd be concerned about something something going on that you're not informed about.

Vikram C. · Answer

We have had to wire the EMD prior to contract signing by the bank.  We did not like it, but dealing with an REO is largely doing stuff that you do not like.

For traditional sales, we would not be willing to do this.

Chris Clothier · Answer

This is exactly how we handle this and it has happened more and more often as even private sellers are getting hit by investors who back out of contracts.  We simply put the EM or deposit with our closing attorney who provides proof to their escrow agent.  If they don't like that - then we walk, but most private sellers are reasonable at that point and realize you are serious about the offer but want to protect your interests as well.

I would take this option before backing out if you really want the property.

J Scott · Answer

This seems weird, especially in a market where there are a lot of buyers bidding on a lot of properties.  This would mean -- essentially -- that if a seller were to receive 5 offers on a property, the 5 buyers would allow have to provide earnest money to the listing agent, and that listing agent would have to give all 5 earnest money deposits to the listing broker.  The listing broker would need to hold 5 EM deposits despite a maximum of one actually being held, and a minimum of 4 having to be returned to the buyers.

Seems like a LOT of overhead for a listing broker...especially in a hot market where most properties are getting multiple offers...

I don't see why it couldn't wait until the contract is signed, since the title company isn't going to be doing any work on behalf of the seller before that point, so there is no risk to the escrow company or title company.

Justin S. · Answer

I've heard of this being done for REO properties, but not traditional sales.

J Scott · Answer

Why don't you just choose another escrow company?  According to Federal law (RESPA, specifically), the seller can't bind you to a specific title company or closing attorney...

Mike G. · Answer

We've never been asked to do this.  I would immediately think this was a scam if someone requested it.  There are thieves out there who set up fake escrow companies and "sell" houses they don't own.  I'm not saying that's what was happening in this case, but I think you were wise to be suspicious.

Mark Hu · Answer

We found the property, besides a 630k mortgage, has a 400k lien from the US attorney which we did not know about. We are walking!

Mark Hu · Answer

This is a private sale in the state of California.
The property is residential income.

Wiring deposit funds before purchase agreement signed?

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