Monday, December 13, 2010

What are "good funds?"

Think of an escrow account as a water tower, except with money. Money goes in, money goes out. For each particular real estate transaction, the amount of money coming in must match what's going out - to the penny.

Typical incoming funds:

- Loan funds
- Buyer's personal funds

Typical outgoing funds:

- Seller's loan payoff
- Broker's commission
- Tax payments
- HOA payments
- Title and lender closing costs
- Seller's proceeds

Another key requirement of real estate escrow is that the incoming funds must be irrevocably in the title company's account before it can disburse against them. In other words, they must be in the water tower such that no one can get them out. There are typically only two ways to accomplish that upon receipt:

  1. Wires
  2. Certified or cashiers checks

Wires are self-explanatory: A wire is a direct deposit of water into the tower.

What makes certified / cashiers checks superior to personal checks?

When a certified check is prepared, the money is pulled out of the account right then and there. Unlike a personal check - which can bounce due to the asynchronous nature of check writing and depositing - a certified check is not merely a promise to deposit water if there is enough water in the account, but it actually has the water attached to it.

I'm an agent or loan officer. What do I do with this information?

Remind your buyers that good funds are needed for settlements, particularly in table-funded states like Maryland. Instruments like personal checks, ACH orders and retirement account checks are NOT good funds, and cannot be disbursed against until they irrevocably clear in the title company's escrow account. Knowing and communicating this well in advance of closing will allow the parties to find the best solution for ensuring a timely settlement!

Flickr photo by doug_wertman