Inherited property can quickly go from financial boost to a major headache.
What is a trust account?
In real estate, a trust account is one maintained by a real estate broker or escrow agent for a specific purpose, such as repairs, or for depositing earnest money from a buyer as part of the process of bidding on the property. The money is held in the account until the transaction is finalized or canceled.
When a buyer makes an offer on a home, he frequently puts down what’s called earnest money, which is essentially a deposit. It demonstrates that he’s seriously interested in the property.
It helps to prevent buyers from making several offers simultaneously and tying up properties while choosing which one they want. For this reason, many sellers require earnest money to ensure the buyer really wants a property.
This deposit goes toward the down payment and closing costs. However, until then, it must be kept for safekeeping.
The real estate broker deposits the money into a trust account so that it’s still available when the transaction is finalized and fees must be paid. Both the buyer and seller have control of the trust account.
Real estate brokers are not allowed to deposit earnest money into their own accounts, which is why they must use a separate trust or escrow account instead. Brokers must deposit the money into the account on the first legal banking day after both the buyer and seller sign the contract.
They also must keep meticulous records related to the account. This includes records of deposits made to the account. These deposit records must include detailed information such as the name of the buyer and seller, the location of the property, and the amount of the deposit and the amount deposited.
If your buyer changes terms, can you keep the deposit? Read more here to better understand your rights.
Trust account example
If you want to make an offer on a piece of real estate, the seller likely won’t accept your offer without an earnest money deposit. Once you and the seller sign the contract, the real estate broker will take your earnest money and deposit it into a trust account, where it stays until the transaction is completed, and it’s time to make the down payment and pay the closing costs.