Iowa Real Estate Practice Exam

What could result in disciplinary action against a broker concerning earnest money?

1. Releasing all earnest money immediately

2. Withholding a portion of earnest money as a commission if a transaction fails

3. Returning earnest money to the buyer without a release form

4. Depositing earnest money late

The correct answer is: Withholding a portion of earnest money as a commission if a transaction fails

Disciplinary action against a broker concerning earnest money may arise from withholding a portion of earnest money as a commission if a transaction fails. In real estate transactions, earnest money serves as a deposit that indicates a buyer's commitment to purchase a property. It is critical for brokers to handle this money in accordance with contractual agreements and state regulations. If a transaction does not close, the proper procedure typically involves determining the rightful owner of the earnest money based on the agreement between the involved parties. A broker taking a portion of it as a commission, without mutual consent or a specific agreement, violates the ethical and legal obligations to manage the earnest money appropriately. This can lead to claims of misappropriation of funds and potential disciplinary actions from regulatory bodies. In contrast, other scenarios like releasing all earnest money immediately or depositing it late may involve procedural or operational issues, but they do not directly compromise a broker's ethical obligation or mismanagement of funds in the same manner. Returning earnest money to the buyer without a release form could be problematic as well, as it usually requires the consent of both parties. However, withholding funds as commission crosses a more serious line regarding the broker's duties and responsibilities to the parties involved.