We buy and sell property in an odd and awkward way. Among the puzzling steps in the process we use is the packaging of earnest money with our purchase-offer contract. Real-estate brokers, representing either buyer or seller but usually the latter , hold these deposits in trust.

Real-estate lawyers also have trust accounts. Buyers should never give earnest money directly to sellers. I have seen FSBO sellers pocket such deposits when the sale fell apart. Earnest money is applied to the agreed-on purchase price when buyer and seller close the sale.

If no sale agreement is reached, earnest money is returned to the buyer in full. Interest may or may not accrue to the buyer, depending on the state. If a buyer defaults on a signed purchase contract, the common remedy is forfeiture of the earnest money to the seller. This forfeiture payment is the usual reason given for sellers wanting large deposits from buyers.

The bigger the deposit, the reasoning goes, the less likely a buyer will back out and the greater the compensation to the seller if it happens. Absent such language, the seller can sue the defaulting buyer for full performance on the terms of their contract. Some sellers prefer the right to sue for performance instead of a limited remedy like forfeiture.

The threat of suing for full performance may get more money out of a defaulting buyer than the forfeiture of earnest money. Some sellers use contracts that give them the choice of either taking the deposit or suing. A contract reflects a meeting of the minds between buyer and seller. Consideration is usually money, but it could be property, the promise of future payment or a combination of things. Buyer and seller can have a legally valid contract for a real-estate sale without having any earnest money deposited as part of their agreement.

If the buyer defaults, the seller will sue for performance with all costs paid by the buyer. The conventional answer is that the buyer shows the seller his degree of seriousness by the size of his deposit. First, the size of the deposit may or may not indicate buyer seriousness.

Generally speaking, a contingency should be worded in a way that allows the buyer to judge whether or not its results are acceptable to him. No agreement, no risk of loss to the buyer.

The seller is not shorted in this arrangement, since he cannot get his hands on the earnest money as a remedy until all contingencies are removed and I then default. Before default, the money is locked away from the seller in the trust account. If the buyer is short of cash, he might pledge personal property or equities as sole compensation for default rather than cash. A highly motivated buyer who has done all of his due diligence before submitting an offer might show his earnestness by not using any results-acceptable-to-the-buyer contingencies.

In that case, the buyer may be able to bring about a contract with a very small deposit, or none at all. This is a high-risk maneuver, however, because it assumes that the buyer has or can get the money to buy the property and that he has thoroughly scoped its assets and liabilities. The upside is that a contract proposed with no contingencies can often bring the seller to a lower price because the offer is seen as a sure sale.

Second, earnest money is often mainly about psychology. Often, a buyer uses that belief against a seller. This gives the buyer a very long look. It keeps the seller psychologically invested with this buyer. The seller, however, may lose his best season for selling or the market may have turned against him. Sellers need to remember that buyers often use information developed as part of their contingency-related due diligence to reduce the final selling price.

A third point to consider is that sellers can propose lower earnest-money deposits in return for concessions on other buyer-proposed terms. Buyers, of course, can raise their deposit in return for seller concessions as part of pre-contract bargaining. Were I a seller facing a low-deposit proposal, I would ask the buyer for a written explanation. And I might propose a double-down alternative: An earnest-money deposit — its size and structure — is a tactic in buyer-seller negotiations.

And for that Get-Out-Of-Jail-Free card, the buyer willingly agreed to and paid a higher price.

What Everybody Should Know About Earnest Money Deposits | North Georgia Blue Ridge Real Estate WebBlog

Like other tactics, the size, structure and wording of a deposit should be thought through in relation to the set of objectives that buyers and sellers want to reach. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of LANDTHINK. Use of this content without permission is a violation of federal copyright law. The articles, posts, comments, opinions and information provided by LANDTHINK are for informational and research purposes only and DOES NOT substitute or coincide with the advice of an attorney, accountant, real estate broker or any other licensed real estate professional.

LANDTHINK strongly advises visitors and readers to seek their own professional guidance and advice related to buying, investing in or selling real estate.

Curtis Seltzer is a land consultant, columnist and author of How To Be a DIRT-SMART Buyer of Country Property , available at Curtis-Seltzer. He also does commentary for Virginia public radio. His new book, Land Matters: Notify me of followup comments via email.

You can also subscribe without commenting. In SC and I suppose some other states, without mutual agreement, deposit forfeitures have to be litigated. The larger the deposit..

Ernest Money Contract

More often now we have transactions with no earnest money at all if it is closing in 30 days or so. Seller risks being off the market for a short time but a fast closing if it works out.

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Seven Must-Read Books on Land, Ranches, and the History of the American West December 29, Buying Land Earnest Money: More may be less, and vice versa November 30, Facebook Twitter Google Plus Pinterest LinkedIn Email. Tags Earnest Money FSBO Purchase Contracts. You may also like. Buying Land Buyers may need to include a lawyer-review contingency June 24, Buying Land Boilerplate releases deserve some thought March 18, Selling Land Asking price: To set or not to set December 30, Curtis Seltzer Curtis Seltzer is a land consultant, columnist and author of How To Be a DIRT-SMART Buyer of Country Property , available at Curtis-Seltzer.

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