Earnest Money Disputes and HB 1730

A word from The Tim: This post is from long-time Seattle Bubble participant Kary Krismer, managing broker with John L. Scott/KMS Renton. Kary’s expertise in both real estate and law gives him a good perspective on issues like this tweak in earnest money law here in Washington State. Thanks, Kary!


Disputes over the release of earnest money are extremely rare, but anyone who has ever been involved with one knows they can be an extremely miserable experience. For a buyer with limited funds it can mean a lengthy delay in being able to make an offer on another property. For both parties it can be very emotionally draining and expose them to the potential of paying attorney fees—both their own and those of the other party.

The most common scenario for an earnest money dispute is after a buyer terminates a contract based on the Form 35 inspection contingency. That contingency is based on a subjective standard, so assuming the buyer’s agent followed proper procedures to give notice, and that there’s no element of “bad faith” in the contract process, the buyer should be entitled to the return of their earnest money. Unfortunately the seller may act in an irrational manner, and refuse to sign the documents that an escrow will likely require allowing the return of funds. Escrows usually will require the signatures of all the parties because they do not want to risk being sued for an incorrect return of the funds, particularly on a transaction which they will not be making any money.

The NWMLS statewide forms (e.g. Form 21) attempted to deal with this problem by setting up a notice procedure which would allow the escrow to release the earnest to the party demanding it. Unfortunately very few escrows have been willing to follow that procedure, and not being a party to the contract, they have not been required to follow that procedure. Instead, if the parties did not come to an agreement the escrow would eventually deposit the earnest money into a Superior Court registry by initiating an interpleader action.

Fortunately the legislature has noticed this problem and passed HB 1730 (pdf) which applies to residential real property transactions. HB 1730 does several things. Most notably it requires that within 15 days after receipt of a written demand for the earnest money that the Holder of the earnest money:

  1. Send a notice to all the other parties to the contract;
  2. Release the funds to the demanding party; or
  3. Interplead the funds.

A Holder following either option 1 or 3 will be protected from liability. Assuming a notice is sent, it will give the other parties 20 days to object to the release of the funds, and give them an address to send their objection. If no response is received within the 20 day period, the Holder has ten days to release the funds to the demanding party. If an objecting response is received, then the Holder has 60 days to commence an interpleader action, absent further agreement of the parties.

The notice is required to be sent to the known address and email addresses of the parties, and the Holder is not required to look outside its records to find an address. This makes filling in the address or email address (preferably both) of the parties on the purchase and sale agreement critical, as well as notifying the Holder of any change of address. [Note: It is somewhat unlikely the Holder would know the parties’ email addresses until after the parties return the Holder’s “Open Package.”]

HB 1730 is not effective until July 24, 2015, but it is effective as to any earnest money held on that date. That means that real estate agents should make sure at least the mailing addresses of the buyer(s) and seller(s) are included in their current purchase and sale agreements, as well as their email addresses if possible. And it also means that buyers and sellers should check to make sure those mailing addresses are included on any contracts that they sign. It is not exactly clear what will happen if that information is not provided, but one likely possibility is the escrow will start an interpleader action within 15 days of the demand for earnest money, and if that occurs, HB 1730 requires the court to pay the Holder their attorney fees and costs, leaving less money for the buyer(s) and seller(s) to fight over.

Disclaimer: This piece is not intended to be legal advice, but is merely the author’s understanding of the operation of the new legislation. Persons needing or wanting legal advice would need to contact and hire their own attorney. Real estate brokers may want to also contact their designated brokers.


About Kary L. Krismer

Kary Krismer is a frequent contributor at SB and a managing broker with John L. Scott/KMS Renton. His real estate interests include keeping track of current real estate issues and developing risk avoidance strategies for buyers, sellers and agents. Kary is also a lawyer, but he is not your lawyer, and his posts do not constitute legal advice.

22 comments:

  1. 1

    This Multiple Offer Scenario on High Priced Seattle Properties

    Makes this earnest money litigation argument much more likely now…

  2. 2

    RE: softwarengineer @ 1 – Hard to say. On the one hand a buyer may be more likely to get buyer’s remorse, but a seller might be more likely to accept an offer that has done a pre-inspection.

    The real issue though is one side being unreasonable, Yes you can have some situations which maybe present issues of real dispute (e.g. what the buyer did to apply for financing within 5 days, or why they were disapproved), most of the issues should be easily resolved and it’s just the emotions of the party getting in the way of doing what’s right.

  3. 3
    herrbrahms says:

    That’s funny. Who even writes an offer with inspection and appraisal contingencies anymore? Don’t buyers know that their role to buy the house based upon only location and finishes, and to budget for the whole house rewire job in year 2?

    *eyeroll*

  4. 4

    RE: herrbrahms @ 3 – That is sadly true is a few parts of King County. Note though, IMHO a seller allowing pre-inspections or accepting an offer waiving an inspection is not in their best interest. So a seller following my advice would still have an inspection contingency as part of their accepted offer.

  5. 5

    RE: herrbrahms @ 3
    The electrical adequacy can be determined without a housing inspection. Simply look for 3 prong plugs on the wall. Check to see if the electrical service was recently replaced, just open the circuit breaker and see if the 1920-1950 circuit box was replaced with a City inspection date applied.

    Flats built on cement floors are great for inspection mitigation….no crawl space rot or water leakage to worry about without cement foundations…they stopped building these type of homes after the 60s. Two story homes with bathrooms or water tanks upstairs are risky….check the ceilings below for cover up patches and painting over mildew…

    Home inspectors know this stuff, so read their reports before ya buy.

  6. 6

    By softwarengineer @ 5:

    RE: herrbrahms @ 3
    The electrical adequacy can be determined without a housing inspection. Simply look for 3 prong plugs on the wall. Check to see if the electrical service was recently replaced, just open the circuit breaker and see if the 1920-1950 circuit box was replaced with a City inspection date applied.

    Flats built on cement floors are great for inspection mitigation….no crawl space rot or water leakage to worry about without cement foundations…they stopped building these type of homes after the 60s.

    There are a lot of houses where someone installed three prong outlets with only two conductor wiring. A simple $5 test device will let you know that, but that’s hardly the only thing that might be wrong with electrical.

    Also, they still make houses with slab foundations–most split entries would be such. Not so sure that would prevent all water issues, but it clearly deals with many rodent issues.

    BTW, the Washington Administrative Code has a section that deals with what inspectors should do or commonly do. I’ll try to dig it up sometime.

  7. 7

    RE: Kary L. Krismer @ 6

    Yes Kary

    Three prong plugs don’t prove a thing….a City inspection stamp on you electrical circuit box tells you if the wiring is fixed. My old 1955 Circuit Box wasn’t even grounded until they replaced it….boy could you get a good shock just grabbing the outdoor water valve….ouch! I wired the house for a hot tub….that was a nice addition, use a licensed electrician for that job….you’re swimming in a tank of water powered by electricity and the risk of death is high.

  8. 8

    RE: softwarengineer @ 7 – King County no longer gives you anything for their inspection approval on new breaker boxes. I wish they did!

  9. 9

    RE: Kary L. Krismer @ 8
    It Was the City of Bellevue Inspector That Inspected and Stamped the New Breaker Box.

    But that was in 1990, times change….

  10. 10
    Mike says:

    By softwarengineer @ 5:

    RE:
    Flats built on cement floors are great for inspection mitigation….no crawl space rot or water leakage to worry about without cement foundations…they stopped building these type of homes after the 60s.

    Nearly all of the new construction town homes and SFH’s I’ve seen lately are slab on grade. The only ones that aren’t is where the foundation cuts into a steep slope.

  11. 11
    redmondjp says:

    By Mike @ 10:

    By softwarengineer @ 5:

    RE:
    Flats built on cement floors are great for inspection mitigation….no crawl space rot or water leakage to worry about without cement foundations…they stopped building these type of homes after the 60s.

    Nearly all of the new construction town homes and SFH’s I’ve seen lately are slab on grade. The only ones that aren’t is where the foundation cuts into a steep slope.

    What area are you in? In Redmond, we’re still using crawlspaces underneath for most new homes that I have seen. Split-level or Tri-level houses used to have the lower level on a slab, like three of the six homes built in my 1970s cul-de-sac.

  12. 12
    Mike says:

    RE: redmondjp @ 11 – This is in 98117 (North Ballard) . Everything is being built slab on grade unless there’s a significant cut in the grade to get the garage close to street level. No crawl spaces or basements in anything new. This seems to be the standard for most builds under $1.5M, though I’ve seen some really fancy concrete structures on a few more expensive homes.

  13. 13

    By Kary L. Krismer @ 6:

    BTW, the Washington Administrative Code has a section that deals with what inspectors should do or commonly do. I’ll try to dig it up sometime.

    Here it is: http://app.leg.wa.gov/WAC/default.aspx?cite=308-408C

    I didn’t realize it had rules on pre-inspections too. There’s one rule in there that they should add to plumbing companies doing sewer scopes–the inspector shall not do any repair work within a year of doing the inspection.

  14. 14
    herrbrahms says:

    RE: Kary L. Krismer @ 13 – Haha, you guys really ran with my electrical example. I was just trying to think of an expensive problem that an inspector would have a better eye for than the average Joe — it could just as easily have been a leaky cast iron waste stack, or poor landscaping letting water pool against the foundation.

    Kary, it’s nice to hear that you’re encouraging your sellers to go through with inspections even when they may have the market power to lord it over buyers on this one. Considering that many Seattle houses built in the 20s-40s are absolute money pits, you probably are doing them a favor by insulating them against a potential future lawsuit. Anyone who is willing to spend >$700k for a Wallingfrelard shack is also going to have the resources to fund legal representation, should they later feel like they were victims of willful nondisclosure.

  15. 15

    By herrbrahms @ 14:

    RE: Kary L. Krismer @ 13Kary, it’s nice to hear that you’re encouraging your sellers to go through with inspections even when they may have the market power to lord it over buyers on this one. Considering that many Seattle houses built in the 20s-40s are absolute money pits, you probably are doing them a favor by insulating them against a potential future lawsuit. .

    That’s a big part of it, but only part of it. There have been some incredible appellate court cases the past few years where the buyer was not able to recover from the seller on incredible facts, in part because they had done an inspection. The courts really have seemed to be moving in the direction of buyer beware, at least where there is an opportunity to do an inspection.

    But even ignoring the legalities, I think encouraging pre-inspections reduces the number of offers you will likely get, and anyone looking at the property during an inspection may be less likely to make an offer (they’ll not have a full opportunity to see the property and they’ll feel someone else is ahead of them). If you’re going to get multiple offers you want to get as many as possible, and pre-inspections counter that.

    Then there’s another legal matter. Anything the seller manages to learn as a result of an inspection they need to disclose to other buyers if it’s material. If one of those buyers doing a pre-inspection gives their information to the seller or listing agent, that information needs to be disproven, disclosed or the item repaired. There are a few agents out there that don’t understand that sellers don’t want to see their inspection report, and they’ll send them without any warning. A pre-inspection might not have a full report, or even any formal report, but the chance of something getting back to the listing agent cannot be ignored.

    And finally, does a seller really want multiple people crawling through their attic area or removing their circuit breaker cover or doing the many other things inspectors do? The chance of damage to the property cannot be overlooked. I had a client moving from another city, and when their house was inspected twice they had damage claims twice! If you have multiple inspectors through you won’t know who did it.

  16. 16

    Here’s one of the cases I’m thinking about. It’s a pretty simple read for the facts and the facts are appalling, but the seller won largely because the buyer did an inspection. Here’s a portion:

    Kelly Hatch, who assisted Visser with some of the repairs, testified that he had difficulty fixing the floors in the bathroom, because the wood was too soft to install screws. When he advised Terry Visser to rip out the plywood to inspect the joists underneath, Visser said he could not put any more into it and told Hatch to find a way to attach the wood. On the house’s exterior, Hatch discovered that wood underneath the bellyband was rotted. Visser instructed him to cover it up with trim. Specifically, Visser said they could cover it in caulking, use a bunch of nails, paint it, and seal it. When Hatch nailed the trim up, it was so rotted that he could not get the nails to stay in. Visser himself testified that he added a new piece of wood to a rotted joist, although he asserted he could not see the rot.

    https://www.courts.wa.gov/opinions/pdf/672428.pdf

  17. 17

    And here’s Annie Fitzsimmons, Washington Realtors’ Legal Hotline lawyer, addressing many inspection issues, including pre-inspections and the idea of a seller doing a their own inspection (something else I really don’t like).

    https://www.youtube.com/watch?v=lX_iSjmEUrM&noredirect=1

  18. 18
    wreckingbull says:

    By Mike @ 12:

    RE: redmondjp @ 11 – This is in 98117 (North Ballard) . Everything is being built slab on grade unless there’s a significant cut in the grade to get the garage close to street level. No crawl spaces or basements in anything new. This seems to be the standard for most builds under $1.5M, though I’ve seen some really fancy concrete structures on a few more expensive homes.

    Almost every new free-standing home I see being built in our area have crawlspaces. I think the reason Ballard prefers slab construction is that the garage is built into the home itself due to small lot sizes.

  19. 19
    Mike says:

    By wreckingbull @ 18:

    By Mike @ 12:

    RE: redmondjp @ 11 – This is in 98117 (North Ballard) . Everything is being built slab on grade unless there’s a significant cut in the grade to get the garage close to street level. No crawl spaces or basements in anything new. This seems to be the standard for most builds under $1.5M, though I’ve seen some really fancy concrete structures on a few more expensive homes.

    Almost every new free-standing home I see being built in our area have crawlspaces. I think the reason Ballard prefers slab construction is that the garage is built into the home itself due to small lot sizes.

    I hadn’t given it much notice until I saw a $1M home a block down from me go in on a 5000 sq ft lot built slab on grade. However some of the green built homes with no garage are also doing slab on grade, so there’s some other advantage.

  20. 20

    RE: Mike @ 19 – There are good portions of north Seattle area that are bog areas. I wonder if it has anything to do with that, and which type system would be better for that?

  21. 21
    FlipperInSeattle says:

    First American Escrow already does #1 when the earnest money is contested, and that notice tells the parties they will dump the money with the courts and start the suit on both parties behalf if there is no agreement on the distribution of funds.

    As for Larry’s general comment that this is all about Seller’s getting emotional – I strongly disagree. NWMLS contracts strongly favor the buyer getting out of a deal with no consequences up until the minute they sign, with no regard for the seller’s costs, time, or hassles.

    As a seller that has successfully gotten 50% of an earnest money from buyers that walked the day before signing, I can tell you it still doesn’t begin to cover the costs associated with less-than-honest buyers tying up a house for 45 days+ and then getting cold feet.

  22. 22

    RE: FlipperInSeattle @ 21 – A notice saying they will dump the money into the court is not number 1. Number 1 would be a notice saying they will disburse it to a party demanding the funds, as explained in the paragraph following the 3 numbered options.

    Also, I assume Larry is me, and I used the seller as an example because the inspection situation is a common scenario. But that’s not to say that the seller might not have a better position in other situations, and the buyer might be the irrational person in such a situation. No one side has a monopoly on possibly being irrational. But irrational being important is only important where the situation isn’t clear cut. There can be some situations where it isn’t clear which side is entitle to the funds.

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