A bidder registers for an auction, with a required $5,000 deposit. He is deemed the high bidder and that $5,000 is deposited in the broker’s escrow account. About 3 weeks later, this buyer can’t perform. Can the deposit be non-refundable, and given to the auctioneer/seller?
This all depends upon state law, and some states have eliminated the “liquidation clause” provision from sale/purchase contracts. One such state is the state of Ohio. Real estate brokers/auctioneers can no longer liquidate the deposit per the buyer/seller agreement.
In my home state, brokers per state law can only release the deposit (earnest money/good faith funds) under one of four particular circumstances:
A separate mutual release signed by both buyer and seller
A closing
A court order
Escheat (2 years)
We think this only makes sense. Many times, it’s not entirely clear which party is in breach, and until both parties agree as to the circumstances, this money should be left undistributed.
For example, liquidating the earnest money to the seller because the buyer was late to the closing (despite having an email noting 5:00 p.m. and not 4:00 p.m.) or liquidating to the buyer because the seller didn’t leave the refrigerator (although he did leave it, in the garage, and not the kitchen) is not reasonable nor prudent.
Additionally, good faith deposits/escrowed funds in some states are not required to be in a broker’s escrow account — like my state of Ohio again. In that event, your contract could possibly have a liquidation clause outside of license law but we would recommend against it.
Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, an Instructor at the National Auctioneers Association’s Designation Academy and America’s Auction Academy. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by the The Supreme Court of Ohio for attorney education.
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