It's important for buyers to understand "Earnest Money" deposit since payments made before closing may not be treated the same in all transactions. How the Earnest Money will be handled is usually spelled out in the purchase and sales contract. You (the buyer) should consult with an attorney if you do not understand the purpose or disposition of payment terms or any other terms in the contract.
Let's start with some basic questions and answers about Earnest Money payments:
What is Earnest Money?
It is good faith money that the buyer usually gives to the seller's agent or may give to the buyer's agent if the buyer is being represented by an agent (requires a Buyer's Agency Agreement).
Is earnest money required in order to have a valid contract?
No. Law does not require an earnest money deposit but most sellers will. If you agree to pay earnest money and you do not make the required payment, you (the buyer) will probably be in breach of the contract.
Note: "Earnest Money is NOT the consideration for the contract - the purchase price IS. The function of earnest money is simpy a good faith gesture whereby the seller has some funds to seek as liquidated damages if the buyer breaches the contract. A contract written without earnest money is perfectly OK and legal although most sellers would ask for earnest money in a counteroffer." Source: Copyrighted: Applied Measurement Professionals, Inc. Lenexa Kansas.
How much Earnest Money is required?
This amount can be negotiated. Usually, it will be a small percentage of the purchase price which may vary depending on market conditions, the price and type of property (vacant land, resale of a home, new construction) as well as other factors.
Where does the Earnest Money go before closing?
The purchase and sale agreement will govern where the earnest money will go. Also, an amount to be paid will be specified and when the payment will be made. It should state whether the money will be held in a trust account sometimes called escrow, who will hold the money, whether it will be credited against the purchase price at closing and what happens to the money in the event the transaction does not close.
Will my Earnest Money earn interest between contract and closing?
Typically not because most earnest money is held by real estate brokers in non-interest bearing trust accounts. In the event the earnest money is deposited in an interest bearing account, the buyer and seller must agree on who will receive the interest. Be sure this agreement is included in the purchase and sale agreement and may require assistance from an attorney.
Who can hold Earnest Money?
Basically, any entity agreeable to (the buyer) and the seller but usually, it will be held by a licensed real estate broker. Buyer beware if you allow a seller or builder to hold the earnest money. You risk not getting the money back should the transaction not close. Therefore, it is good practice to have the real estate broker or attorney hold the deposit since they are required by law to deposit the money in a trust account. This minimizes the risk of the monies being used improperly.
Is Earnest Money different from an option fee?
Yes. An option fee is a separate fee the buyer may elect to pay in a purchase and sale agreement to walk away from the transaction during a specified time. Earnest money may be refunded under certain circumstances; the option fee is non-refundable.
Is there a federal law that allows me to rescind my home loan and wouldn't that allow me to get back my Earnest Money?
There is a federal law that gives a buyer three days to cancel a home loan commitment but it does not give the buyer the right to cancel a purchase and sale agreement and get a refund of the earnest money. The buyer is obligated to the purchase as specified in the sales contract and is not related to your right to obtain the best loan possible.
Does the buyer get back the Earnest Money if the transaction does not close?
This depends on why the transaction did not close. A typical contract may contain contingencies which must be met in order for the contract to proceed. Some requirements may be:
- the buyer makes a good faith effort to obtain financing
- the buyer may need to sell his/her own property first
- the seller may need to make certain repairs
- the seller will need to provide good title
If the seller does not meet his obligations, then the buyer may be entitled to a refund. However, if the buyer breaches the contract, then the earnest money will be forfeited. Also, the party injured by the breach may seek additional damages by asking for "specific performance" where a court may intervene. Be sure to consult with an attorney to fully understand the consequences and remedies if the purchase does not close.
What if there is a dispute between the buyer and the seller on who is entitled to the Earnest Money?
The real estate broker will continue to hold the monies in a trust account until the dispute is resolved either in writing or until a court decides the matter. The broker is not allowed to pursue a claim for either party but may appear as a witness in court and make necessary documents available.
Donna Yates, Realtor with Coldwell Banker High Country Realty in Blue Ridge Georgia. Please visit me on the web: http://www.move2northgeorgia.net for great mountain homes for sale, real estate tips and advice, news and happenings in the North Georgia Mountains.
Repost June 10, 2010