Holding earnest money with written authority: when a broker can hold funds without depositing them.

Earnest money in Alabama real estate isn’t just a check tucked into a folder. It’s a signal—proof that a buyer is serious and that a seller can trust the next steps. But there’s a wrinkle that trips some folks up: holding earnest money without depositing it can be legal, but only when there’s written authority backing it. Let me break that down and show you how it works in the real world.

Breaking down earnest money: what really happens

• The basics: When a buyer makes an offer, they usually include earnest money to demonstrate good faith. This money isn’t just “extra”; it ties contractual intent to a real asset that the parties can agree on.

• Where it sits: Most of the time, earnest money goes straight into a trust or escrow account, held by the broker, a title company, or a designated escrow agent. The purpose is clear—the funds belong to the transaction and must be accounted for with care.

• The why behind the rule: Real estate deals hinge on trust. Buyers want assurance that the seller will honor the deal, and sellers want confidence that the buyer is serious. Proper handling of earnest money is a fiduciary duty, not a side task.

Here’s the thing about written authority

• The key idea: If a broker has written authority from the buyer or the seller, they may hold the earnest money in their trust account without depositing it immediately into an escrow account. That written go-ahead creates a documented consent to hold funds under specific conditions.

• What counts as written authority: This could be in the form of an addendum to the contract, a separate escrow agreement, or a written directive from the client to the broker. The document should spell out who is holding the funds, the amount, the purpose, and the timeline or conditions for later depositing.

• Why written authority matters ethically and legally: Without it, holding funds can ride roughshod over fiduciary duties and state rules. It looks like you’re “doing something with someone else’s money” without a clear, documented consent. In Alabama, keeping records and ensuring transparency aren’t optional extras—they’re part of sound professional practice.

What happens if there’s no written authority?

• The risks pile up quickly: If a broker holds earnest money without written authorization, they’re venturing into a gray area or worse, a breach of fiduciary duties. It can raise questions about trust, misappropriation, or a failure to follow the contract terms.

• Possible consequences: Ethical concerns, disciplinary action by the Alabama Real Estate Commission, and potential legal challenges from the buyer, seller, or both. The debtor seeks a remedy, and the broker may face sanctions, fines, or other corrective measures.

• A practical takeaway: When in doubt, document. If you’re ever asked to hold funds without a formal directive, pause and get it in writing—or direct the funds to a neutral escrow arrangement until there’s a clear agreement.

A simple, compliant path for Alabama pros

If you’re stepping into this space, here’s a straightforward way to handle it that keeps everything aboveboard and easy to audit.

• Start with clear communication

• Make sure all parties know who is holding the funds and why. A spoken agreement isn’t enough; you want a written trail.

• Secure written authority

• Obtain a signed directive from the buyer or seller that permits you to hold the earnest money in your trust account for a defined purpose and timeframe.

• Document the funds precisely

• Note the amount, check or wire details, the date received, and the intended use. Keep copies of the instrument that accompanies the funds.

• Use the right account, and keep good records

• If you’re holding funds under written authority, you’re still responsible for proper accounting. Track deposits, withdrawals, and any interest in a way that’s easy to explain if questioned.

• Have a clear deposit plan

• When the contract requires moving money to a formal escrow or closing account, follow through with the deposit according to the contract and applicable rules.

• Stay within the rules of AREC and state law

• Alabama’s real estate framework emphasizes trust, disclosure, and accountability. When a rule exists about trust accounts or how funds are to be handled, follow it. When there isn’t a specific rule, rely on the ethical standards that govern fiduciary duties and client confidentiality.

• Prepare for disputes

• If parties disagree about the terms, have a procedure in the written directive for resolving it—whether by mediation, arbitration, or a court process. Record all communications and keep the funds secure in the interim.

Common misconceptions—and the realities behind them

• “If we’re using a broker’s trust account, we don’t need escrow.” Not quite. The need for escrow or a formal hold can vary by contract terms and the written directive. The important thing is that everyone agrees in writing and that the funds are traceable.

• “Holding funds means the broker owns the money.” Wrong. The broker is a custodian, not an owner. The money belongs to the transaction and must be handled with care and transparency.

• “Any written instruction will do.” The form and scope matter. Vague language invites disputes. A detailed directive that names the parties, purpose, amount, and timing reduces risk.

The why this matters in the Alabama context

• It’s about trust and clarity. Real estate deals can hinge on timing—when inspections happen, when contingencies clear, when financing closes. A clear, written plan for handling earnest money keeps everyone aligned and protects everyone’s interests.

• Regulatory scrutiny isn’t hypothetical. The Alabama Real Estate Commission expects licensees to manage money responsibly and to keep a transparent paper trail. When you document consent and follow the agreed-upon process, you’re not just handling a transaction—you’re upholding professional standards.

• It’s about good habits, not just legality. Even if something is technically permissible with written authority, the best practice is to be proactive: secure written instructions upfront, maintain meticulous records, and communicate changes promptly. That habit pays off when a deal hits snags or a dispute arises.

A few quick questions folks often ask, answered in plain language

• Can I hold earnest money without depositing it if the client signs something? Yes, if there’s a clear written authorization that specifies this arrangement and outlines the terms, including what happens if the deal falls through or moves toward closing.

• Is it ever better to deposit the funds into a traditional escrow account right away? In many cases, yes. Escrow accounts offer a neutral, audited route that minimizes questions about custody. The written directive can still guide later steps if a vote or condition changes.

• What should I do if a buyer wants to pull the funds after I’ve started holding them? Refer back to the written directive and the contract. If the buyer pulls funds, you’ll need to verify that the withdrawal aligns with the documented terms and any applicable contingency outcomes.

A final thought—writing it down saves you headaches later

Let me explain it this way: in real estate, the path from offer to closing is full of moving parts. A simple, well-drafted written authority about earnest money isn’t a luxury; it’s a practical tool that keeps the transaction clean, the parties calm, and the broker protected. It’s about turning good intentions into solid, verifiable steps that stand up to scrutiny and, more importantly, keep the deal on track.

Takeaways you can carry into your next transaction

• Earnest money signals serious intent but requires careful handling.

• Holding funds without depositing them is permissible when there’s clear written authority from the buyer or seller.

• Always document the amount, who holds it, why, and when it should be deposited or released.

• Rely on the Alabama Real Estate Commission’s guidance and your contract terms to shape how and when funds move.

• When in doubt, secure written instructions and maintain a meticulous paper trail.

If you’d like, I can tailor a simple one-page template for a written authority directive that you can adapt for your next Alabama deal. A ready-to-fill form can help you move smoothly from consent to custody to closing, with everything in order and easy to audit.

In the end, earnest money isn’t just money. It’s a trust instrument—an early promise between buyer and seller that a deal is real. When you respect that trust with clear, written directions, you’re not just following rules—you’re building confidence in every transaction you touch. And isn’t that the kind of professionalism every broker aims for?