Earnest money? Who's Ernest?

Sometimes we find that purchasers, when preparing to buy, focus heavily on putting aside money for their down payment that they forget about (or don't know about) other up-front monies that they will need.  The first one in the process is "earnest money."

When you write an offer with your agent (me) you'll also need to write a check called an earnest money deposit.  As its name implies, the purpose of this check is to demonstrate to the seller that your offer is "in earnest." You see, this deposit does a few things.  First, to show the seller that you are serious.  So serious, in fact, that you are willing to put that money on the line and forfeit it to the seller should you breach your contract.  Second, it also serves as a deposit on your side of the equation.  What I mean is that when we go to closing, this  money is credited back to you.  

One question people often ask is "if this doesn't go through, will I lose this money?" The answer most of the time is no.  All contracts are contingent on financing or proof of funds for cash deals. If something happens (you lose your job, for instance) that causes you to be denied financing, you will not lose this money.  However, if you are approved and just change your mind, this is default (breach) and you forfeit this money. Fortunately, in my career, this has only happened enough times for me to count on one hand.

Another common question is "how much earnest money do I have to put up?"  There is no solid answer here.  There are no rules.  You want to offer enough of a deposit to show your seriousness about the property and something that is in proportion to the value of the property.  For example, if you are interested in buying a $300,000 house, the seller is highly unlikely to accept a $500 earnest money deposit.  Why?  If you default, he only stands to recoup $500 after taking his house out of the active listing status while under contract with you. For that priced property, he will want a more sizable deposit to make it worth his while in the event of a breach.  Make sense?

The stewardship of your earnest money is strictly regulated by state government.  Your money must be deposited into a special trust account to be held there until it can be rightfully disbursed. Once your offer is accepted by the other party, agents are required by law to deposit your earnest money into that trust (escrow) account within 48 hours.  It's as safe as being in Gringotts (for all you Harry Potter fans!)

If you have any real estate questions, either of us would be happy to talk with you.  Information is power.

Don't Bother?

I have a client who is interested in a house that is subject to "third party approval."  This means the house is on the verge of foreclosure and the seller is hoping for a short sale.  What does "short sale" actually mean?  It's when the seller owes too much or the market will not bear enough to satisfy his mortgage.  Therefore, the seller's lender(s) have to agree to take a "short" when/if the house sells.

This process is nothing new, but since the U.S. economy entered this period of funk and dysfunction, short sales have become more common as a means to help avoid foreclosure.  After all, banks don't want to hold properties and to go through a foreclosure costs them dearly (thank you lawyers and your unbridled passion for billing!)

So, my client is interested in this home.  Her permanent home is in another state, but wants a second home here.  That means she has time on her side, no urgency, no house to sell.  And, she wishes to purchase in cash, meaning there are no financing contingencies and closing can take place in a matter of days, weeks, whatever.  Before proceeding, I contacted the listing agent to inquire if there are any additional forms I need to present with the offer.  And do you know what he said to me? 

"Don't bother." 
  Click here for shock and awe!

What?  He proceeded to explain that six weeks ago he received an offer which has been with the lender all this time waiting for a response.  He didn't want the buyer who wrote this offer to lose out because he/she has been so patient.  Again, what??  

I politely reminded him that if my client wants to write an offer, BY LAW, I have to write it.  And, if I forward that offer to him, BY LAW, he has to present it to the lender and seller.  That's right, folks.  South Carolina law states that real estate agents must present ALL OFFERS to the seller, even an offer that is presented after the seller has already accepted one.  A real estate agent is NOT empowered to make decisions for his/her client.  So, as soon as I brought this fact to light, this agent began to sing a different tune.  Problem is...I'm not sure if I trust him after he said that to me.  

I also pointed out that short sale procedures tend to take a long time because the bank is evaluating not only the shortage they can accept, but also the buyer and their stability,.  I'd be willing to bet that they would be interested in comparing this existing offer to a cash deal that can close at any time.  I'd be willing to bet on that all day long!

Call me a "goodie two-shoes" but the lesson here is that you must protect yourself by choosing a Realtor(r) who not only has experience but who knows the LAW in your state.  I'm a rules player.  Rules and regulations exist for a reason and we all must follow them for everyone's protection.  Continuing education, being active in the marketplace and doing things right the first time are vital to providing the client the service that they deserve and that they expect.