Earnest Money Tie Ups

Real estate transactions are nearly always offered with an earnest money deposit. Generally this is about 1% but some buyer may "sweeten" the pot with high amounts, particularly when paying in cash or using a large down payment loan. The seller likes the larger earnest money because it shows serious intent by the buyer. The earnest money is typically held by a neutral third party often the title/escrow firm handling the transaction.

The buyer usually has some contingencies associated with their offer. A common contingencies are  inspection and loan. The inspection contingency states that the buyer will buy the house provided they are subjectively satisfied with the results of a professional inspection.This is typically a short period of 7-10 days in which the buyer can effectively exit the transaction and is entitled to a refund of the earnest money. The more common outcome of an inspection period is some form of negotiated agreement for the seller to make repairs.

The second contingency is based on the successful loan commitment from a lender. This one is not subjective but requires a legitimate contingent event to occur in order for the buyer to be eligible for an earnest money refund. If due to no fault of the buyer the lender is unable to fund the loan the buyer would exercise the right to terminate the agreement and is entitled to a refund of earnest money. No fault of buyer is objective and could be an arguable status. Generally a buyer must act in good faith to get the loan, this means submitting all documents to lender in a timely manner, following lender guidelines regarding credit. So if a buyer voluntarily quits his job, or goes out and buys a new car before closing, the buyer is not entitled to his earnest money back if the loan fails. But if an underwriter decides that their is something in the file the missed when approving the loan initially, this is not the fault of the buyer so long as they acted in good faith. The buyer is entitled to a refund of the earnest money.

A failure to close late in the process often is irritating to all parties involved. These are the situations that can lead to disputes over earnest money. The title company will not release the earnest money to either party until all parties agree. Buyers need to be aware that once they release the inspection contingency their earnest money is at risk. Even if they are entitled to receive it back a seller can stonewall for a fair amount of time tying up that money. This can be frustrating for buyers and agents alike. Buyers should be cautious about putting up excessive amounts of earnest money beyond the typical 1% as there is no guarantee that money will be promptly returned or in some cases returned at all. Buyers or sellers seeking to capture the earnest money in a dispute are always well advised to seek legal counsel before digging in for any kind of fight. Real Estate agents and Title Officers are usually NOT lawyers and must be careful not to practice law or give legal advice outside the scope of their very limited expertise.

The Strongest Offer Isn't Always the Highest Offer

Sometimes a seller is faced with the desirable dilemma of having multiple offers on their home. Initially the tendency is to think the highest offer is the best. Generally that would be true, but not always. If the seller is trying to move to a new house they are purchasing they have to think about the big picture. If the sale fails, then that could cost them money on the house they are moving into or even cause that sale to fail. Sometimes the best offer is the one with the least obstructions. That all cash offer with a five day inspection period and two week close might work better for the seller than a USDA financed offer with a ten day inspection and a 60 day close that's $5,000 higher and right up against the buyer's maximum approval.

Usually the highest offer is the one the seller takes but there are times when a "cleaner" offer that is a little less money is the better route for the seller. In this seller's market, buyers should try to structure their offer to suit the seller's needs. The buyer's agent is well advised to talk to the seller's agent a try to figure out what the seller is looking for in an offer. Not so much the dollar amount but the terms. Sometimes sellers have a natural inclination to refuse to pay closing costs for a buyer. Even though an offer can be structured to net the seller the same amount he wants, some sellers have illogical or emotional reasons for not taking a particular offer that is otherwise very strong. In a multiple offer scenario the buyer may not get a second chance to present the best offer possible or to modify terms to suit the seller's idiosyncrasies.

In this fast selling market buyers need to be thoughtful about their approach to an offer.