Hi I'm Jay Seville, the owner of JustNewListings.com Realty and I wanted to cover with you a really interesting and dramatic subject today and that is earnest money deposits. The acronym for that would EMD for short and it brings a number of issues to the table and especially from a buyer-agent's perspective. How to protect your client? How to protect their money from being trapped and in limbo if there's a disagreement between the purchaser and the seller etc. What can you do? And if you're the buyer, how can you educate your own agent on these matters since probably one in a thousand are doing anything to protect you and your earnest money Deposit which is a sad state of affairs. I'll just leave it at that.
For example, let's say that the home you are buying is $750,000. You will be depositing quickly about $15,000 in most cases and it is part of your down payment. This causes you to be invested financially since that if you break the sales contract you stand to lose your earnest money deposit (EMD). It makes the contract stronger in essence and gives the seller confidence in working with you that you are serious about buying his home.
So for example with a 500,000 dollar house, you might have an earnest money deposit. Typically, it would be about 10,000 dollars. The best buyer-agents would do their best to minimize your earnest money deposits when possible, that way you have as little skin in the game as possible. That way your options are as open as possible because life is crazy and there are curve balls and you never know what's going to happen. So what happens if you're on your contract and you decide you do not want to buy the house anymore. And even if you're within a window, let's say you have a seven-day home inspection contingency and you decide the day after going under contract or three days later, you don't want the home anymore. Your earnest money has already been deposited. You have full right to get all of it back because you are not defaulting on the contract. You have a full week window for that home inspection contingency. And at that point, is it that simple to get your money back? Or is there more to it than that?
It would be great if refunding earnest money deposits was so simple as sending the money back to its rightful owner who even was within the boundaries of the contract in voiding the sales contract. But the real world and the paper world (contracts) are often strikingly different in how things play out. As a general rule brokers cannot just refund the earnest money deposit back to the buyer.
His hands, he is essentially handcuffed. He cannot release the money back even though everybody knows it's supposed to go back to that buyer unless he gets it in writing from all parties. And essentially every one fills out their form and says, "How much of the pie, the earnest money deposit is supposed to go to which party, the buyer or the owner of the property?" Now in most cases, 9 out of 10, everyone just signs real fast and will put the full amount of the Earnest Money Deposit. It goes back to the buyer and it's all done in a day. Once in a while though, if the seller is upset or if there are any questions whatsoever where they feel like they've lost time on the market a few days, therefore they should at least get a thousand dollars of that earnest money deposit. They will not sign off on the release, the release for the earnest money funds. And instead, will try and split it with the buyer or negotiate it. And therefore, the broker cannot give the money back to the buyer. Legally, his hands are tied.
If the seller will not sign the release sending the money back to the buyer, then the buyer's broker must send notice in a letter to the seller stating he is going to release the funds back to the buyer in 30 days unless he (buyer's broker) receives a written protest disputing that release from the broker to the buyer. If the seller does make this dispute within that 30 day window the buyer's broker will not be able to release funds. The courts will take it from there likely in most regions.
This scenario where the seller refuses to sign the release of the funds means your earnest money is held hostage practically whether it be for just that 30 days or much longer should the seller dispute in writing the release after being notified by the broker. There is a lot of room for drama. Not having your earnest money available would make it hard to move forward with the search for a new home.
How do we get around it? It's not that hard. Probably the best trick of all that I found for just taking the drama out of real estate transactions, is an addendum up front when you submit your contract. And it's one sentence in most cases: "All parties agree that the earnest money deposit will be deposited after all parties have signed off on the home inspection addendum." So in other words, you're saying that no money is going to be deposited until the buyer and seller have already worked through their home inspection issues and signed off on the home inspection addendum together which is at least usually that process is going to be a week. So it's keeping the earnest money funds in the buyer's hands until for sure everybody is moving forward with the contract. Because sometimes in the negotiating of home inspection items, there can be drama. There can be clashes. Bad blood can be created which lends itself to a buyer's earnest money deposit funds being stuck in escrow and no way to get them out without going through formal proceedings.
For example, let's say that the home you are buying is $750,000. You will be depositing quickly about $15,000 in most cases and it is part of your down payment. This causes you to be invested financially since that if you break the sales contract you stand to lose your earnest money deposit (EMD). It makes the contract stronger in essence and gives the seller confidence in working with you that you are serious about buying his home.
So for example with a 500,000 dollar house, you might have an earnest money deposit. Typically, it would be about 10,000 dollars. The best buyer-agents would do their best to minimize your earnest money deposits when possible, that way you have as little skin in the game as possible. That way your options are as open as possible because life is crazy and there are curve balls and you never know what's going to happen. So what happens if you're on your contract and you decide you do not want to buy the house anymore. And even if you're within a window, let's say you have a seven-day home inspection contingency and you decide the day after going under contract or three days later, you don't want the home anymore. Your earnest money has already been deposited. You have full right to get all of it back because you are not defaulting on the contract. You have a full week window for that home inspection contingency. And at that point, is it that simple to get your money back? Or is there more to it than that?
It would be great if refunding earnest money deposits was so simple as sending the money back to its rightful owner who even was within the boundaries of the contract in voiding the sales contract. But the real world and the paper world (contracts) are often strikingly different in how things play out. As a general rule brokers cannot just refund the earnest money deposit back to the buyer.
His hands, he is essentially handcuffed. He cannot release the money back even though everybody knows it's supposed to go back to that buyer unless he gets it in writing from all parties. And essentially every one fills out their form and says, "How much of the pie, the earnest money deposit is supposed to go to which party, the buyer or the owner of the property?" Now in most cases, 9 out of 10, everyone just signs real fast and will put the full amount of the Earnest Money Deposit. It goes back to the buyer and it's all done in a day. Once in a while though, if the seller is upset or if there are any questions whatsoever where they feel like they've lost time on the market a few days, therefore they should at least get a thousand dollars of that earnest money deposit. They will not sign off on the release, the release for the earnest money funds. And instead, will try and split it with the buyer or negotiate it. And therefore, the broker cannot give the money back to the buyer. Legally, his hands are tied.
If the seller will not sign the release sending the money back to the buyer, then the buyer's broker must send notice in a letter to the seller stating he is going to release the funds back to the buyer in 30 days unless he (buyer's broker) receives a written protest disputing that release from the broker to the buyer. If the seller does make this dispute within that 30 day window the buyer's broker will not be able to release funds. The courts will take it from there likely in most regions.
This scenario where the seller refuses to sign the release of the funds means your earnest money is held hostage practically whether it be for just that 30 days or much longer should the seller dispute in writing the release after being notified by the broker. There is a lot of room for drama. Not having your earnest money available would make it hard to move forward with the search for a new home.
How do we get around it? It's not that hard. Probably the best trick of all that I found for just taking the drama out of real estate transactions, is an addendum up front when you submit your contract. And it's one sentence in most cases: "All parties agree that the earnest money deposit will be deposited after all parties have signed off on the home inspection addendum." So in other words, you're saying that no money is going to be deposited until the buyer and seller have already worked through their home inspection issues and signed off on the home inspection addendum together which is at least usually that process is going to be a week. So it's keeping the earnest money funds in the buyer's hands until for sure everybody is moving forward with the contract. Because sometimes in the negotiating of home inspection items, there can be drama. There can be clashes. Bad blood can be created which lends itself to a buyer's earnest money deposit funds being stuck in escrow and no way to get them out without going through formal proceedings.
About the Author:
For cutting edge consumer advice and tips for purchasing Great Falls real estate visit the website of JustNewListings.com Realty Inc. There you can find homes for sale in Great Falls Virginia and surrounding areas in DC metro as well.
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