What is the point of earnest money?

Question

I know that it is supposed to be a form of insurance so that the seller knows that the buyer is sincere about going through with the deal. But I recently had a home where the buyer simply said that they were terminating the offer because the house didn't pass inspection. Although they never really had an inspection done, they just wanted out of the contract. I could take them to court and possibly make them fulfill the contract, while in the meantime I can't take any other offers on the house. So I had to mutually agree to terminate the contract and give them back the earnest money.

So what's to keep a buyer from simply walking away from a deal, and simply saying, "if you want to sue me, than sue me. In the meantime you can't sell your house." So you might as well give me my money back. If you set the earnest money high enough to discourage this problem, you also discourage a lot of potential buyers.

So how often do buyers actually have to forfeit the earnest money?

Here's the problem ace. If I say no you can't have the earnest money back, than they'll simply say that they're terminating the contract because the house didn't pass inspection. In which case they get the earnest money back.

acer, how many times have you known the seller to actually end up forfeting the earnest money?

Answer 1

Well first of all it should be held by a third party like a real estate company. If you are doing a for sale by owner then have a title company that you pick hold it, with a release that you as the seller release it.

Most earnest moneys will say 3 days to apply for loan, 15 days to get approved, 30 days for appraisal, If you want a home inspect that must be done in 15 days. (im just making up these days I would personally have all of them done in less then a week).

But once they are all done, you know. It only gives them a right to keep you on earnest money, if they said the home inspect failed say where? Failed what? Im not a real estate agent but sometimes they are good to use for that reason or at least consulted if you dont want to pay a full commission.

Good luck.

Answer 2

Most offers to buy a house are accompanied by a check. This check is generally referred to as the "earnest money deposit." The basic reason for the deposit is to impress the seller that the buyer "earnestly" intends to purchase the property.
The amount of the deposit varies from purchase to purchase, depending on a variety of factors. If a property generates a lot of interest, a buyer may make a larger deposit to convince the seller that their offer is stronger than the others. During "hot" markets, deposits are generally larger than during slow markets.
In normal times, buyers should hesitate before making a deposit that is larger than two percent of the purchase price. Underwriting guidelines sometimes require strict documentation of such deposits. A buyer may often be required to show a bank statement just prior to the date of the check, plus evidence that the check actually cleared the bank. If you're closing quickly, this might require a trip to the teller window at your bank.
There are reasons to try and keep the deposit as small as possible, but not so small that the seller doesn't take it seriously. You see, once a buyer and seller agree to terms, the earnest money deposit is usually placed in a "trust" account. At that point it is no longer the buyer's money -- it belongs jointly to the buyer and seller.
Almost all deals close and the earnest money funds are applied to the buyer's down payment and closing costs. As the saying goes, however -- there are exceptions to the rule.
Some sellers think that if the deal falls through, the earnest money deposit is automatically forfeit. Some buyers think that if the deal doesn't close, they automatically get the money back.
Neither one is true.
Even when the failure to close is the buyer's fault, the seller doesn't have a "right" to the deposit as a way to "punish" the buyer. Nor does the buyer automatically get the entire deposit back, even when they are not at fault.
First, there are normally a small amount of cancellation fees that must be paid. These fees are collected from the deposit. Second, since the deposit is held in trust, both the buyer and seller must agree on the disposition of the funds. This is a quirk of law in most states and the real estate agents and their companies have no control over the situation.
If something goes wrong very early in the deal, the seller normally understands and the deposit is usually returned to the buyer without a fuss. When things go awry later in the transaction, both parties usually exercise common sense and negotiate a fair solution. In a few rare occurrences, the buyer and seller find it difficult to agree.
The point is that is always makes sense to reach an agreement. Failure to agree ties the money up for awhile, could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both sides -- more so than you realize at the time.
Serious problems are the exception, not the rule. Most "challenges" are routine to a qualified professional real estate agent. The situation may be new to you, but the agent may have dealt with it many times in the past.

Answer 3

A real estate contract is full of "outs" for a buyer with virtually none for the seller once there has been a "meeting of the minds". Your buyer's claim that it didn't pass inspection could arguably be one of the outs because for all we know the inspection could have been by his mother-in-law. But a smart seller would make sure that the inspection contingency would end within 10 days of acceptance disallowing much time off the market. When a buyer gives an invalid excuse for breaking the contract, it is then he risks losing the deposit and a great deal more because it also opens himself up for more damages beyond what is compensated in the good faith (including the extra time your house is off the market during the lawsuit!). Many people, if threatened with a lawsuit look to cut their losses and may be willing to give up (some of) their deposit in an effort to make the problem go away, especially once they know they are at fault.

Due to the many buyer contingencies involved in a real estate contract, it is rare for them to lose their deposit if they have half a brain. Still the money does more than provide insurance to the seller, as it also "binds" the contract.

Answer 4

If the offer has a contingency for an inspection, the buyer can't just say that it failed. They have to provide documentation of that fact from a licensed inspector. If you allowed yourself to be bullied into giving back the earnest money, you blew it. Same thing applies to a mortgage contingency. The buyer has to provide the denial letter to get their earnest money back.

A properly written offer will have timeframes that have to be met such as the buyer will apply for a mortgage within 'x' number of days and has 'y' number of days to schedule an independent inspection. If they fail to provide proof of hitting those milestones they are acting in bad faith and can legitimately lose their earnest money.

Do keep in mind that a savvy buyer can derail a mortgage application with phony information or by applying for a wad of other credit and get their earnest money back. And an unscrupulous one facing loss of their earnest money may file a lis pendens action against your deed, claiming that they are about to sue. This would effectively prevent you from selling to anyone else until that wound it's way through the courts.

Answer 5

There are all sorts of situations, but as a seller, you have to weigh practicality with a sense of rightousness. Most contracts specificy times in which certain things have to happen, i.e., mortgage approval within x number of days, inspection within x number of days, etc. If they did not have an inspection done by a certified home inspector (as should have been specified in your contract?), that's their choice, but they shouldn't be able to get their money back if they haven't fulfilled their end of the contract.

Depending on the amount of earnest money, you have to weigh the time and cost of pursueing someone for a relatively small amount of money AND keeping your home off the market OR you have to just say, "screw it" and return it so you can terminate the contract and get it back on the market. In a slow market, you might decide to wait them out. In a hot market, you might decide to just cut your losses. If you aren't in a hurry to move, you might just say, "forget it, you don't get it back". But if you're committed to move, then you have to be practical.

Had one customer who ended up not being able to get the kind of mortgage specified -- turns out he had not disclosed some tax liens to his loan officer. The seller and buyer ended up splitting the earnest money, just to keep the house from not having to sit unavailable for 4 weeks. No one was happy -- but it got the house back on the market, and under contract again two weeks later.

Answer 6

Who told you that you had to return their earnest money ? In cases as you describe, it is typical for the SELLER to retain the earnest money.

I'm almost afraid to ask you gave you the advice to return the earnest money.