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Legally speaking: Can earnest money be applied to my commission?

By Peg Ritenour, OAR Vice President of Legal Services/Administration

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, our “Legally Speaking” series spotlights some of the timely questions that are being asked by REALTORS. This one involves whether earnest money can be retained as part of a commission…  

Q: A property that I have listed is ready to close with a title company from another area. When I reviewed the HUD-1 in preparation for the closing,  I noticed that the commission owed to my brokerage was reduced by the amount of the earnest money. When I called the title company, I was told that I should just retain the earnest money as part of my commission. I have never done this and when I questioned the title attorney, he said that’s how it is routinely handled in his area. Can I just write a check to my brokerage from my trust account for the amount of the earnest money or would this violate the license law?

A:  Ohio Revised Code section 4735.24 specifies that once earnest money is deposited in a real estate broker’s trust account the broker shall maintain that money until one of four events occurs. One of these is that the transaction closes and the broker disburses the earnest money to the closing or escrow agent or otherwise disburses the money pursuant to the terms of the purchase agreement. Another is that the parties provide written instructions signed by both parties specifying how the money is to be disbursed.

Therefore, whether or not the earnest money can be applied to a broker’s commission depends on the terms of the purchase contract. In some areas of Ohio this is a common practice and the purchase contract specifically provides that the earnest money will be applied to the commission at closing. However, if the terms of the purchase contract do not state that this is how the earnest money will be disbursed at closing, then according to the Ohio Division of Real Estate and Professional Licensing, this practice cannot be followed unless the buyer and seller provide written, signed instructions that the earnest money be handled in this manner.

In this situation, before you follow the title company’s instructions, you need to review the terms of the purchase contract to determine whether it permits the earnest money to be handled in this manner. If it does not, to comply with the license law it will be necessary for the buyer and seller to sign an agreement allowing the earnest money to be applied to the commission at closing.

Tags: legal, Legally Speaking