The FAR/BAR residential contract requires earnest money held by:
Audio Lesson
Duration: 2:08
Question & Answer
Review the question and all answer choices
The seller
CORRECT_ANSWER
An escrow agent
The buyer's attorney
FREC is the regulatory body that oversees real estate licensees in Florida, not a financial institution. It doesn't handle or hold earnest money funds for transactions.
FREC
The seller cannot hold the earnest money directly as it creates a conflict of interest. The seller has a vested interest in the transaction and cannot be trusted to safeguard the buyer's funds impartially.
Why is this correct?
The correct answer is B because Florida Real Estate Commission (FREC) regulations require earnest money to be held by a licensed escrow agent, broker, or attorney to ensure neutrality and protect both parties' interests.
Deep Analysis
AI-powered in-depth explanation of this concept
Understanding who holds earnest money is fundamental to real estate transactions because it affects the security of the contract and protects both parties. The FAR/BAR contract is Florida's standard residential purchase agreement, and its proper execution is crucial for valid transactions. This question tests knowledge of Florida's earnest money handling requirements. The correct answer is B because Florida law mandates that earnest money must be held by a neutral third party to ensure fairness. Option A (seller) is incorrect as it would create a conflict of interest. Option C (buyer's attorney) is problematic because while attorneys can hold funds, they represent the buyer, not a neutral position. Option D (FREC) is the Florida Real Estate Commission, which doesn't handle transaction funds. The key principle here is that earnest money must be held by a disinterested third party to maintain neutrality and protect both buyer and seller interests.
Knowledge Background
Essential context and foundational knowledge
Earnest money serves as evidence of the buyer's good faith intent to purchase the property. In Florida, the FAR/BAR contract (Florida Association of Realtors/Bar Association) is the standard form used for residential transactions. The requirement that earnest money be held by a neutral third party is designed to protect both buyer and seller. If the transaction fails, this neutral party will distribute the funds according to the contract terms and applicable law, preventing disputes over who rightfully deserves the money. This requirement stems from real estate principles of fairness and the prevention of fraud.
Think of earnest money like a deposit at a hotel. The hotel (escrow agent) holds it safely, but it's not the hotel's money. The guest (buyer) gets it back if conditions aren't met, or the hotel keeps it if the guest doesn't show up (buyer defaults).
When you see a question about who holds earnest money, visualize the hotel analogy to remember it must be a neutral third party like a hotel, not the guest or the property owner.
For questions about who holds earnest money, remember the principle of neutrality. The answer is never the buyer or seller directly, but always a disinterested third party licensed to hold funds.
Real World Application
How this concept applies in actual real estate practice
Imagine a buyer submits an offer with $5,000 earnest money on a $300,000 home. The listing agent cannot deposit this check into their brokerage trust account because they represent the seller's interests. Instead, the funds go to a neutral title company or attorney who holds them in escrow. If the inspection reveals major issues and the buyer terminates properly, the escrow agent returns the money. If the buyer backs out without cause, the seller may claim the funds. The escrow agent follows the contract terms to distribute the funds appropriately.
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