Introduction. As we know today, there are many bank-owned properties being listed and sold. A term commonly used to refer to these homes are REOs, i.e. “Real Estate Owned.” After a lender forecloses a home, it takes it back into its REO inventory, prepares and lists it for sale. Most of the heavy lifting is done by the Realtor® holding the listing. However, the bank, not the Realtor®, makes the rules. One of these rules frequently is that the earnest money deposit must be sent to an escrow or other entity out of state. While it is important that the out-of-state institution receiving the funds is actually a licensed escrow, there still can be risks. The two main reasons, both inter-related, are that (a) the other entity is regulated by the laws of another state, and (b) accordingly, the Oregon Real Estate Agency has no control over what happens to the trust money held by an escrow beyond its reach.
Most real estate transactions begin with the submission of a buyer’s written offer of purchase. In Oregon, the most common form of offer is the one published by Oregon Real Estate Forms, LLC or “OREF.” It is entitled “Residential Real Estate Sale Agreement” and identified as Form #001 (hereinafter the “Sale Agreement”). The printed portion of the Sale Agreement describes how the buyer’s earnest money deposit will be handled. Early in the transaction, the money will generally be deposited in the buyer’s agent’s trust account or the escrow trust account. However, in most REO sales, the banks have their own form, usually called an “Addendum” that supersedes many of the Sale Agreement provisions – including who will hold the earnest money deposit until closing. [Why the banks use a document entitled “Addendum” rather than “Counteroffer” is a mystery. Their Addendum is intended to replace and supersede all provisions to the contrary that are contained in the buyer’s initial offer. In all respects, that is a counteroffer. – PCQ]
Oregon Real Estate Trust Fund Rules. Addressed below are the general Oregon rules regarding where such trust funds are to be kept:
- Location of Oregon Trust Accounts. Oregon real estate licensing laws do not require that the real estate companies maintain client trust accounts, or “CTAs.” However, if the brokerage has a CTA, all of the funds must be deposited in a bank authorized to do business in Oregon and with a main or branch office located in this state. Oregon’s escrow laws require that all trust account funds must be deposited in a bank authorized to do business in Oregon. The effect of these regulations means that neither an Oregon real estate broker nor an Oregon licensed escrow, is/are legally permitted to automatically transfer trust funds to an out-of-state depository institution. At the commencement of the transaction, all deposit money must initially go into an Oregon depository institution.
- Earnest Money Disputes.
- If the brokerage is holding the deposit in its trust account and a dispute arises regarding the funds, the principal broker may – though is not required to – disburse the funds to one of the parties following receipt of a timely written demand. Otherwise, if there is a dispute, the earnest money will remain in the broker’s trust account until the parties, or a court, authorize where they are to be disbursed.
- If an Oregon escrow is holding the deposit in its trust account, it is not authorized to disburse those funds to either party without a joint written agreement to do so, or a ruling from the court.
- If an out-of-state bank or escrow holds the deposit, Oregon’s licensing laws do not apply. So if the funds are held out- of-state, in the event of a dispute over their disposition, it could be difficult or impossible to timely secure the return of those funds back to Oregon. Even the jurisdiction of an Oregon court is severely hampered in the enforcement of an Oregon judgment outside of our state.
The Conundrum. So how can buyers acquire bank REO properties located in Oregon, if the bank insists that the earnest money deposit be sent out-of-state prior to closing? The answer is that escrow is permitted by the Oregon Real Estate Agency to transfer earnest money trust funds to an out-of-state institution upon the express written authorization of all parties, i.e. the seller(s) and buyer(s). This means that at the commencement of the transaction, the funds must first go into an Oregon regulated trust account. What the parties agree upon thereafter is between them.
Escrow may insist that any joint written instruction from the parties include language disclaiming its responsibility for control over the funds following an out-of-state transfer. These instructions may emphasize that the parties will assume all risk of loss. Buyers should keep in mind that the seller-bank decides at the inception of the transaction who the depository will be and where it will be located. It is even conceivable that the out-of-state escrow’s funds are held in the same bank as the REO seller. There have been anecdotal reports of some supposed “escrows” in other states that do not behave as true “neutrals” and often regard the REO bank as their “client.” Thus, it is invariably the buyer who is at greatest risk when his/her earnest money funds are transferred out-of-state.
Real estate licensees representing buyers of REO properties should emphasize to their clients that they are not experts in the trust account rules of other states, and cannot be held liable should a problem later arise. OREF has recently created a Buyer Advisory on this issue and it will be made available to Oregon Realtors® by or before the end of this year. This Advisory is a good risk management tool when representing buyers of REO properties.
