Exactly what is the purpose of earnest money? I’ve always thought that it was to protect the seller in case the buyer backed out. Sort of like a non-refundable part of the down-payment. I’m now told that this isn’t exactly how it works. Can someone explain this to me?
SOmeone might be in later with a better explanation, but the way it was explained to me was that it really is what it says – it shows the seller than the buyer is in earnest about getting the property. Anyone who’s willing to tie up five or ten grand has got to be serious about the offer they are making.
–Cliffy
My friend is selling a house, and he can’t do anything with the earnest money (he thought of putting down as earnest money on his new purchase). They told him that in the event the guy backs out, you have to go to court and let them decide how much of the money is yours. It involves a whole lot of legal crap or something. I just wanted to know the straight dope.
You’re pretty much correct. The money in real-estate (at least the locales that I am familiar with) don’t actually change hands from buyer/seller until the possesion date. Until that time, all money (earnest, down payment) are held in trust by a third party, almost always the lawyer. However, some real-estate companies have trust accounts set up for earnest monies to be held.
It opens up a can of worms if the buyer wants to back out of an accepted offer and conditions are met (and vice/versa).
Another reason for it is it helps show the qualifications of the buyer. If you don’t see a pre-approval for a mortgage for them, and they want to buy your $600,000 property and only putting down $1K in earnest, it doesn’t look too good.
I don’t know all the legal-eze, but here’s my Earnest Money Hell Story:
In 8/01, Mr. Athena and I made an offer on a house and put down $2K of earnest money. We asked for a very long period of time before closing - Feb 1 to be exact - so we could sell our current house. The sellers were OK with that, since they were building a new house and it wouldn’t be done before then, anyway.
Around November, our house still hadn’t sold. I called our real estate agent to talk about our options, since we couldn’t really afford both houses. He said he’d talk to the sellers and get back to us. A few days later he called and said the sellers weren’t going to be done with their new house until March, so they were all for changing the closing date to March 1. Great! I said. Make it so!
Christmas Eve we get a call from our agent. It seems that the sellers had found a new buyer, one who could close on Feb 1. “huh?” we say. After talking about it for a bit, we decide that since our house still hadn’t sold, we’d go ahead and let the other house go if they truly had a new buyer. Seemed like a win/win situation - they had a buyer, we were not all that upset about not getting the house. Just return our earnest money and we’ll back out of the deal.
We tell that to our agent. He calls back a few days later and tells us 'No, they are going to keep your earnest money."
WTF? We let them out of a signed contract at their request and they want to KEEP our earnest money? We say “how the $#@! can they do that?” After doing some digging, it seems that our idiot agent never got the March 1 closing date in writing, so legally we’re bound to Feb. 1. If we want to buy the house on Feb 1, we can. If we don’t, they want our earnest money, and they’ll sell the house to the other people. At this point, it’s the first week of January. We haven’t sold our house, and we haven’t even talk to mortgage companies. My aunt is dying of brain cancer, and my parents are staying with us for the holidays. Closing on a house in another state in less than a month seems an impossibility.
What could we do? We called a lawyer. Two weeks and a couple hundred dollars later, we had our earnest money back. He’d found a loophole in our contract and used it to get our money back.
The whole thing still leaves a bad taste in my mouth, though. I felt very used by both the real estate agents - ours, for not getting a contract in writing (he claims that he didn’t remember me telling him we actually wanted to change the closing date), and theirs, for selling the house out from under us.
Yikes! I’m glad we don’t have plans to move for quite a few years yet. I guess that’s why they tell you to hire a lawyer for real estate deals, huh? I still don’t understand how they can get away with that, even if it wasn’t in writing. It was still a verbal agreement!
Verbal agreements mean nothing in real estate. The Staute of Frauds and the Parol Evidence rule make pretty sure of that.
Earnest money is to get former tennis star John McEnroe to utter “You MUST be serious.”
Real estate sales agreements, to be enforceable, must usually be in writing. Expect the writing to be the entire agreement. If you aren’t willing to hold up your end or don’t fully understand what the mutual comittments are, you shouldn’t sign the contract.
What happens to the earnest money is based upon the agreement and the law, not upon either parties desire for it.