When we are representing buyers making offers, we generally suggest a serious "earnest money" check accompany the contract when I present it to the buyers.
Here, the custom is to accompany an offer with a check for 5% of the offering price. Sometimes we go in with less. But in a competitive situation, the size of the earnest money check can make a difference in the sellers thinking about each offer.
Why is the size of the check important?
Before any seller takes a house off the market, they want reasonable certainty that the buyer will be ready to perform. And the earnest money check is supposed to provide some level of comfort - after all, if the buyer backs out, the seller gets to keep the earnest money check, right?
But it's not that simple. When a buyer walks away from the deal, you may find yourself with a can of great big worms!
The only time the seller gets to keep the money is if the buyer defaults, and in most cases, there are a number of contingencies that, if the buyer can't meet them, allow him to walk away from the contract with his earnest money check.
How can the buyers get out?
- If the home inspection is funky, the buyer can walk - especially if the seller doesn't want to make any needed repairs.
- If the house appraises for less than the contract price, the buyer may be able to walk away, especially if the seller won't lower the price to the appraised value.
- If the buyer is unable to obtain financing, he can usually get out of the deal.
- If there are funky title issues that can't be easily resolved, bye bye buyer.
- And little tiny termites can derail the whole thing.
When a buyer walks away, even if they are in default, you may not get the money, at least not easily. Our contracts require that the buyer and seller both sign a release before the funds can be dispersed to either party. And some contracts allow the brokers to have some percentage, typically half, of any funds that the buyer forfeits.
There's another problem. If you have backup buyers, you really can't sell to them until you resolve whatever issues you have with your original buyer - and get a signed release.
In three decades of selling real estate, I've never had a transaction where more than a small part of the deposit went to the seller when a buyer defaulted. In most cases, it's just that the situation is not completely clear cut. Lawyers get involved, and sellers often just want to put everyone's energy into finding new buyers.
The most important thing in any transaction is good faith. And sometimes it's hard to make accurate judgments when you're looking at a buyer's offer or, in the case of a bidding war, several buyers' offers.
If you are planning a move to or from the Washington, DC metro area, contact me before you make any real estate decisions. Call me at 202-549-5167 or send an email to email@example.com.