The facts about so-called boat “escrow”...
Background:
Boat brokers, unlike real estate brokers are – in general – NOT regulated or licensed. Known exceptions:
Florida and
California. Outside of these you are completely on your own. Even where regulated, don't expect to be treated much differently. Unregulated brokers may or may not merge your
money with their own funds, may go out of business and you are SOL. Good luck. Use of an independent escrow agent and specific escrow instructions are HIGHLY recommended.
Also unlike real estate, there is no such thing as “title insurance”. Unlike real estate, tracing the true chain of
ownership is VERY difficult as there are amazing differences between states,
registration, titles and the like. Unless a boat has been continually documented since manufacture, one can never insure fully that the boat has not been damaged, salvaged, stolen, et al. This is EXACTLY why – and again unlike real estate – why title
insurance for boats is unheard of. No insurer is willing to take that bet.
Even in
Florida – where the
broker boyz will say otherwise – there is no state mandated “escrow account” that Florida brokers are “required” to establish. To the contrary, Florida law mandates only a
single “Trust Account” (important difference, read on), wherein all funds from all pending sales are merged into a
single account owned and managed by the
broker.. Here's why...
Quote:
“Trust Vs. Escrow..
“In acting as a non-biased third party protecting the interests of all parties involved, the escrow agent is often considered a trustee in the transaction. Despite the terms trust and escrow being used interchangeably, there is actually quite an important difference between the two.
The escrow agent is an impartial and independent party from both the buyer and the seller in real estate. The agent simply holds money, documents and other property based on terms outlined in a contract. In essence, the agent works as a proctor on behalf of the contract itself, making sure everything is followed before allowing the deal to proceed.
A trust account works in quite a different way. These types of accounts are usually used for one of two purposes. The first being an account that is opened by a trustee to hold trust funds payable on the occasion of certain terms being met such as a death in the family or a marriage. Sometimes trust funds are also created to hold “in trust” a sum of money that is payable when services are rendered in the future. A popular example of this is an attorney who is held on retainer. The funds used to pay the attorney are usually held in trust until the attorney completes a service to warrant that payment.
While trust and escrow operate similarly in terms of banking, the key difference between the two lies in the way responsibilities are outlined for the third party “trustee” in each case. An escrow agent serves as a fiduciary for both the buyer and seller, with duties assigned as outlined by the agreement between the two. A very narrow, limited relationship.
In a trust, the agent’s role is broader and more flexible. The trustee’s duty is to take care of the assets for the benefit of its beneficiary above all else, which can entail a number of different tasks (note: for Florida boat brokers the broker acts only as trustee, with no named beneficiary).”
|
Believe me the differences may seem minor – they are anything but. The key words you should remember regarding escrow (and not trust accounts) from the above are these:
1. Limited role.
2. Impartial third party.
3. Escrow instructions (detailed contract)
An escrow agent is completely independent from the transaction, and represents neither the buyer, broker or seller. Any monies paid and/or titles are kept separate and apart from the parties. The escrow agent is loyal only to the escrow instructions/contract which are typically long and specific. Much of the escrow agent's
work deals with doing a thorough title search to find and resolve defects, and last to provide title
insurance – a vital guarantee of the deal for both buyer and seller Best familiar example: real estate or property sales.
Real estate brokers, escrow and title insurance agents are all licensed and highly regulated. For example the laws and regulation in Florida for real estate are extensive, serious, tightly regulated and enforced.
Boat brokers – regardless of their bluster – are in general neither licensed nor regulated with very few exceptions (Florida being one). Even in Florida, the
regulations are sparse – just 6 pages - and in no way compare to tightly regulated real estate transactions.
Don't confuse the two.
First of all, boat brokers are not impartial. In most cases they represent the seller, much less frequently the buyer, and almost never both. It is their job to be partial. Their listing agreements and
purchase offers are short and simplistic, and in general rather self-serving. In most (non-regulated) states your earnest and pay off monies can and are often merged with their own funds and can be abused. To make matters worse, title searches are only hopeful, are not guaranteed, and there is no such thing as boat title insurance.
In short, in these states you're on your own, and can only hope the broker is honest, and won't go out of business while your deal is pending. Now let's discuss Florida.
It should be clear that the potential and actual abuses of boat brokers became of such concern that Florida felt obligated to establish some simple rules. The law set forth simple licensing, with minimal requirements, minimal bond and insofar as buyer funds, caused Florida brokers to establish a separate “Trust Account”. Naturally, such laws were heavily lobbied by the very active Florida Broker Mafia and thus the relevant section was kept short, simple and still left the brokers in charge.
How simple? The Florida section on Yacht Brokers is just 6 short pages (including their “separate Trust Account”, compared to over 100 for Real Estate brokerage, and hundreds more pages for real estate Escrow and Title Insurance. I'm not kidding. In comparison, the Florida boat brokers' section on “separate trust account” is a couple paragraphs.
Here are the facts:
A
boat broker is almost never impartial, and either represents the buyer, or (sometimes) the buyer. In truth, the agreements tend to favor the broker (eg commission based on original listing
price, not actual negotiated sales
price, etc.).
Their listing and
purchase offer agreements, are short, simple and self-serving, and serve only minimally as escrow instructions.
The Florida “separate Trust Account” is not really escrow. This account – unlike those of true escrow agents – is under the complete control of the very partial
boat broker, who is listed as as “Trustee”. No beneficiaries are named, no separate trust agreement is filed. To comply with the few paragraphs of “regulations” the Florida boat broker needs only set up a separate “Trust Account”, keep simple separate records for it, and upon settling the deal to provide only a simple, itemized “closing statement”. As Trustee, the broker has great
power and discretion (not so for escrow agents), under the minimal guidance of their simplistic listing and PO agreements.
Just as in the unregulated states, purchase deposits and payments are placed into an account established, owned and managed by the very partial broker, and subject to pretty much the same risks. The sole difference is a bit of bonding (probably not enough to cover all claims), and a potential third degree “felony” - but only if the broker fails to keep a separate log of the account, or to provide itemized closing statements.
If the broker goes bankrupt – the monies may be tied up for years in completing claims, litigation, damages and expensive court proceedings.
Of great concern too is the need for a good title search. Unless a boat has been constantly documented since first
sale, it is extremely difficult to establish a solid trail of
ownership. Some states don't provide titles and register only. All manner of unrecorded but
legal liens may exist. There are few records of real
history, damage, accidents and the like. The point?
Unlike real estate, boat brokers tend to perform minimal title searches, and at best may only use the same search engines we all can access. These engines are quite clear in that they while they can find some issues, they cannot guarantee the title – at all. Ergo? Ergo NO title insurance that I am aware of. You seem to be quite on your own.
Compare a boat broker's “purchase offer” with the much longer and much more detailed contracts used in real estate sales. Compare to the completely independent and impartial real estate escrow agents, who represent only the extremely detailed escrow instructions, who have no discretion beyond same, and who will guarantee and insure the title. Night and day.
So what to do?
I make no bones about it. I don't like the
current state of minimally supervised boat brokers, and you can be sure a loud few will – once again – parse these words in search of uncrossed “T's”, with an eye toward rejecting the whole of this well intended long post. That's their track
record. Easy,
cheap arguments and wholly political Yes, there are absolutely a fair number of truly good brokers, but they are few and far between. Consider these few are worth their weight in platinum and you should
work hard to find and cooperate with one.
As far as escrow goes, you would be wise to do the following:
1. Negotiate all purchase orders presented to you. Any broker who calls their own PO “standard” is misleading you. There are no “standard” agreements. Almost all are broker creations may be loosely based on YBAA forms, but are still modified in their own interest.
You are NOT required to put 10% down. The argument that by not doing so you are “not serious” is false; this is just a ploy to take you and the seller off the market. Remember YOU are taking the major financial risk and paying for an expensive
survey – just to find out IF the boat is sound. Be especially careful regarding
survey and trial clauses, to make clear that you may reject a boat for any reason and at your sole discretion.
2. Much better, create and use your own PO, based on minimum “earnest money”. Now it might be reasonable to increase the deposit, but only AFTER a successful survey. By doing so the risk is equalized: you, the buyer risk an expensive survey; the seller risks taking the boat off the market for a couple weeks. Even Steven.
3. Ask the broker how they search the title, using what service/resource, and to provide you a copy. A good broker should already have done this, to be sure the boat can actually be
sold. Most don't until after a PO is received. Really. Strongly consider paying for your own search (there are a few good ones), but keep in mind that no search is guaranteed or insured.
4. Assemble your own quickie black doctor's bag of simple and inexpensive tools/meter, and learn how to use them (not hard). Do your own “30 minute Survey” (buy Don Casey's “Inspecting the Aging Sailboat”). Again, not hard. Not a bad idea to include a clause in your own PO that gives you the right to reject based on your own survey as well.
5. Hire your own true and independent escrow agent. Example: Escrow dot Com, widely used and respected, charges $267 for a $30K purchase. Don't even consider using a boat broker for faux-escrow purposes – I once asked two different brokers what they'd charge to handle a private transaction for us, and I was quoted around $1500 (for a $25K sale)! Amazing, considering the broker was asked to take no responsibility, but simply act as a neutral to accept, hold and then exchange money and title as directed by both parties.
Funny how Escrow.com quotes just $267 for a MUCH more thorough and independent, true escrow
service.
Frankly, these brokers were confused by the proposition, and seemed unable to comprehend a truly neutral and independent role. That's the point and this last – more than anything – should confirm the very real difference between a boat broker's “separate Trust account” and “services”, and with actual, detailed and independent escrow.
Carry on. YMMV. Get ready for the onslaught, lol...