Question

A seller is unable to convey a marketable, unencumbered title to a buyer. What action should the listing broker take with any earnest money held in escrow?

1) Pay it all out to the seller
2) Return it in full to the buyer
3) Deduct any commissions and expenses due and pay the balance to the seller
4) Deduct any commissions and expenses due and return the balance to the buyer

Answer 1

In a real estate transaction where a marketable title cannot be provided by the seller, the earnest money should be returned in full to the buyer, as the seller has not met the terms of the agreement.

Step-by-step explanation:

When a seller is unable to deliver a marketable and unencumbered title to a property, the earnest money held in escrow usually serves as a protection for the buyer. The role of escrow is to hold and manage funds or property until all the conditions of a transaction are met. In the case where the seller fails to provide a clear title, the earnest money should typically be returned in full to the buyer. This is because the buyer cannot be expected to go through with the purchase without the assurance of a clear title, and thus the seller has not fulfilled their part of the agreement.

The listing broker should not pay out any earned commissions or deduct expenses due from the earnest money since the transaction has fallen through due to the seller's inability to fulfill their obligations. Therefore, the correct action would be to return the earnest money in full to the buyer.