Pat Kennedy - Your Washington, DC Real Estate Connection

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How Important Is It To Be "Earnest"?

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 housepat@mac.com.

 

Comment balloon 52 commentsPatricia Kennedy • December 16 2013 09:26PM

Comments

It is everything! Is it not?

Posted by Laura Cerrano, Certified Feng Shui Expert, Speaker & Researcher (Feng Shui Manhattan Long Island) almost 7 years ago

Hi Pat - it's not always about the size of the earnest money deposit but the intent -- the importance of truly being earnest.   

Posted by Michael Jacobs, Los Angeles Pasadena 818.516.4393 almost 7 years ago

Pat, this is an excellent post.  In Dallas, earnest money is generally 1%. This week, I have a buyer who is submitting 10%, to show that she is earnest.

Posted by Sharon Parisi, Dallas Homes (United Real Estate Dallas ) almost 7 years ago

Patricia: Yes, there are so many ways to get out of a contract, right to the bitter end. But it does make sellers feel better, and buyers more committed. However, the buyer does start spending money when the loan company orders an appraisal and they get a home inspection.

Posted by Hella Mitschke Rothwell, Hawaii & California Real Estate Broker ((831) 626-4000) almost 7 years ago

When I was a senior in high school, the drama department put on "The Importance of Being Earnest", and the phrase sort of stuck in my brian.  When you get a buyer who is earnest and is into good faith, it's a winner!

Posted by Patricia Kennedy, Home in the Capital (RLAH Real Estate) almost 7 years ago

I'd say it was pretty important to be earnest and act in good faith.

Posted by Roger D. Mucci, Lets shake things up at your home today! (Shaken...with a Twist 216.633.2092) almost 7 years ago

The burden to administer these deposits falls on the "Trust Agent" who is usually the broker representing the buyer. 

While we haven't had many sales fall through, I've found that when it occurs, patience has it's own reward.  A buyer or seller will sign the release if there is sufficient incentive.

Earnest money deposits are important.  It separates the serious buyer from the spec buyer. 

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) almost 7 years ago

In North Carolina, we don't pay a lot of attention to EM--we are a due diligence state and the buyer "pays" the seller a due diligence fee for the right to decide in some negotiated time frame whether or not to go ahead with a purchase. So what really counts to show buyer's "earnestness" is the due diligence fee and not earnest money. I will always take more DDF over EM to protect my sellers. Typically, our EM is about 1%.

Posted by Nina Hollander, Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor (Coldwell Banker Realty) almost 7 years ago

Pat,

That old Earnest Money Deposit sure lets the sellers know that the buyer has some "skin in the game."

Rich

Posted by Richard Iarossi, Crofton MD Real Estate, Annapolis MD Real Estate (Coldwell Banker Residential Brokerage) almost 7 years ago

Good morning Patricia,

In Austin our typical earnest money is 1%. Sometimes a buyer will present an offer with high earnest money to show how serious they are about the purchase. If the buyer opts out during the option period there is no issue they get the earnest money back. It's after that time period it gets sticky:).

Posted by Dorie Dillard CRS GRI ABR, Serving Buyers & Sellers in NW Austin Real Estate (Coldwell Banker Realty ~ 512.750.6899) almost 7 years ago

In Texas I just do not see earnest money as a way of strengthening an offer. I believe there is a class given locally that explains 17 different ways for a buyer to get out of a contract. While contract use to favor the seller, they have come a long way on the other side. Nice Post Patricia!

Posted by Jeff Fritzson: Frisco Real Estate Pro, Your Success is My Focus! (Jeff Fritzson Real Estate, Ebby Halliday Realtors) almost 7 years ago

In Georgia, if the buyer wants he can walk at any time during due diligence. It's like commercial contracts have been for years. I like the system better because it defines the out date clearly. However, it's even more important to have an "earnest" check with the offer to show you are not wasting people's time needlessly.

Posted by Ron Barnes, "Most agents claim they're #1 - I THINK YOU'RE #1! (Associate Broker at Berkshire Hathaway Home Services Georgia Properties) almost 7 years ago

Patricia, thanks for the great post.  It's so interesting to learn the differences in different parts of the country.  Here in Utah, if we see 1% of the purchase price, that's unusual.  It's usually $500 or $1,000, regardless of the price.  The deposit is typically held by the buyer's broker, and the seller does not have to sign to release it.  Crazy, huh?  Oh and the purchase agreement is written so the buyer can walk for ANY reason (or no reason at all) prior to their due diligence deadline.  You can see why it's so important for a seller to get a nice warm fuzzy about the buyer before accepting an offer - "earnest" doesn't mean much.

Posted by Ann Zieve, Unmatched Ownership Experience (Keller Williams Success Realty) almost 7 years ago

Patricia,

Excellent explanation and examples of the reasons a buyer may walk away from the contract. 

Posted by Bill and MaryAnn Wagner, Jersey Shore and South Jersey Real Estate (Wagner Real Estate Group) almost 7 years ago

In Arkansas, the earnest money paragraph that used to be in the contract has been completely eliminated.  If you do earnest money, it requires a special addendum which just adds more paper to the transaction.  The REO properties usually require earnest money so I think Arkansas made a big mistake in taking the section out.  They also took out the part about a limit of some sort in repairs!  I do not see how the contract has been improved.

Posted by Barbara S. Duncan, GRI, e-PRO, Executive Broker, Searcy AR (RE/MAX Advantage) almost 7 years ago

Great explanation of why the earnest money checks matter.  Thanks, Patricia.  

Posted by Ron Marshall, Birdhouse Builder Extraordinaire (Marshall Enterprises) almost 7 years ago

Here, it's at least 2.5% due at contract signing, although there are exceptions both for higher and lower deposits.  And the money is usually returned to the buyer because as you indicate, there are many "ways out." 

However, if there are two similarly strong offers, and one has a higher earnest deposit, that's the one the seller will most likely choose.

Posted by Kat Palmiotti, The House Kat (406-270-3667, kat@thehousekat.com, Broker, Blackstone Realty Group - brokered by eXp Realty) almost 7 years ago

Good morning Pat. Earnest money matters to sellers for sure and I always encouraged buyers to put a full 10% down right up front. Why not? It says to a seller they are serious about buying and as you point out, with cause they get it all back anyway.

Posted by Sheila Anderson, The Real Estate Whisperer Who Listens 732-715-1133 (Referral Group Incorporated) almost 7 years ago

This is a fantastic topic, Patricia & one that I'm currently dealing with.  I agree that a larger earnest check puts more "buyer skin in the game".  Other than that exercise in good faith I've never seen it hold it's weight --- the attorneys rarely fight for it and everyone typically just wants to move on.

Posted by Brenda Mayette, Getting results w/ knowledge & know-how! (Miranda Real Estate Group, Inc.) almost 7 years ago

Pat, those checks have been going up around here, not to 5%, but more than in previous years. I did just get one that was small and cautioned the buyer's agent that my clients may reject the offer because the clients didn't seem to be committed.

Posted by Mike Cooper, GRI, Your Neighborhood Real Estate Sales Pro (Cornerstone Business Group Inc) almost 7 years ago

Patricia, I've had two deals over the years where the seller wouldn't release the earnest money deposit. Fortunately, here in Virginia we have provisions for handling escrow funds should this happen. If necessary, the courts will decide who gets the deposit.

Posted by Michael Setunsky, Your Commercial Real Estate Link to Northern VA almost 7 years ago

Patricia...Thank you for another great blog.  Nebraska is very similar to your area and like Michael #21, we do have provisions for what to do if there is an impasse with the Seller and Buyer. Funny part of this all is that the wide range of Earnest money. I have had from $0 to $50,000. 

Posted by Mike McCann - Nebraska Farm Land Broker, Farm Land For Sale 308-627-3700 or 800-241-3940 (Mike McCann - Broker, Mach1 Realty Farmland Broker-Auctioneer Serving Rural Nebraska) almost 7 years ago

I believe most transactions can end with a hand shake if all parties have been earnest in their efforts. Sometimes things don't work out.

Posted by Gary L. Waters Broker Associate, Bucci Realty, Fifteen Years Experience in Brevard County (Bucci Realty, Inc.) almost 7 years ago

I think the intention of the parties can really become very important here.

Posted by Cheryl Ritchie, Southern Maryland 301-980-7566 (RE/MAX Leading Edge www.GoldenResults.com) almost 7 years ago

Pat, so well said and honestly even buyers who have gone over the 10 day inspection period here, if they are in earnest & just have a sloppy agent, I have advised my buyers to just give them an extension...so far so good...I so agree if they are going to kick out, I want it done early!!

Posted by Ginny Gorman, Homes for Sale in Southern RI and beyond (RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate) almost 7 years ago

You are absolutely right!  A substantial earnest money deposit can set your buyers in a great place in a competition for the property.  Buyers understand that there are few cases where there is risk in losing their money.  Sellers need to understand better that by trying to hold onto that first buyer's deposit, they are hindering their ability to sell to another buyer.  It gets sticky for sure!  Thank you for sharing.

Posted by Karen Feltman, Relocation Specialist in Cedar Rapids, Iowa (Cedar Rapids/Iowa City, IA KW Legacy Group) almost 7 years ago

Excellent information. I know there are a lot of buyers out there worried about writing that earnest check because they think they'll lose it if something goes wrong. Not always the case as you pointed out.

Posted by Suzanne Otto, Your Montgomery County PA home stager (Six Twenty Designs) almost 7 years ago

This is a good post and it reveals a professional and their experiences. In my transactions, I do a lot of up front work way before I contract or accept earnest money. Then, what happens after that is clear and precise even if it goes south

Posted by Richie Alan Naggar, agent & author (people first...then business Ran Right Realty ) almost 7 years ago

Patricia

Excellent post, we have agents here in Phoenix still getting $500 or $1000 on offers

under $300,000 that is the way we did it 35 years ago! I always get a few thousand more, and have WON when I had $10,000 on $180,000 offer and my buyer got the house ...BECAUSE OF THE EARNST MONEY.

Posted by Dan Dee McGinnis The Pumpkin Man (HomeSmart) almost 7 years ago

It is still quite common here in WI to do 1000, for some that is alot of money still

Posted by Kristin Johnston - REALTOR®, Giving Back With Each Home Sold! (RE/MAX Realty Center ) almost 7 years ago

We have tried to push the EM up here, but $500 is pretty standard. That amount is pretty worthless, but it is so easy for a buyer to get out of a contract before the home inspection is completed AND accepted.

Posted by Than Maynard, Broker - Licensed to List & Sell - 405-990-8862 (Coldwell Banker Heart of Oklahoma) almost 7 years ago

Good Morning Pat, I hope this makes your top ten list this Sunday, You make some great points.

Posted by Will Hamm, "Where There's a Will, There's a Way!" (Hamm Homes) almost 7 years ago

Good morning Pat, this is a great post-never heard the term "earnest money" in real estate but thank you for teaching us.  SUGGESTED!

Posted by Joanna Cohlan, Designing, Decorating & Staging Westchester Homes (Fresh Eyes For Your Home) almost 7 years ago

I would like to add to this discussion and that is how earnest money is returned even when it probably shouldn't be. In Oklahoma, agents need to have a release on contingency signed every time a required task is completed which means inspections, appraisa, and final underwriting. Without documentation this money given in earnest will not go to the rightful participant. We also have to do our due diligence to protect our client.

Posted by Joe Pryor, REALTOR® - Oklahoma Investment Properties (The Virtual Real Estate Team) almost 7 years ago

Pat I just saw this post which Lenn re-blogged.  I also commented on Ginny Gorman's  blog on basically the same topic.  I have been told by more than one Real Estate Attorney here in CT that it is very hard of a Seller to keep the earnest money, especially if the Buyer takes the Seller to court to get it back.  Each of the Attorney's stated that a Judge will almost always side with the Buyer, unless the Buyer does not have any reasonable reason for backing out of the deal.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 7 years ago

Earnest money is over-rated in my personal opinion. There are an enormous amount of buyer protections built into contracts in Colorado and though a higher dollar amount of earnest money may make a seller feel better, reality is that the seller would nearly never end up getting to keep the earnest money.

Posted by Bruce Swedal, Denver Real Estate almost 7 years ago

In California, both parties have to sign off to who gets the earnest money if the buyer doesn't or can't perform. It's unlikely a seller can keep earnest money. In my newbie days a REO listing agent threatened me that my buyer who couldn't get his mortgage loan that the seller, the bank, would keep his earnest money. It took three months, but the buyer got back his earnest money. There can't be two open escrows on one property (it's illegal if there is), so if seller wants to sell they will have to remedy the earnest money.

It's recommended buyers not deposit more than 3% of the purchase price. 1% is usually customary. Patricia, this is a timely post.

Posted by Pamela Seley, Residential Real Estate Agent serving SW RivCo CA (West Coast Realty Division) almost 7 years ago

Yeah, sometimes I wonder if it's really enough to deter buyers from walking when they know there are so many loop holes in the contract. That's why as a listing agent, a lot of buyers agents really don't like me because I tend to be very strict on deadlines and do everything I possibly can to protect my seller in the case that something does go wrong to give the buyer fewer loopholes. But you're right, 9 times out of 10, the buyer is going to walk away with the earnest money in the end. I've only had one where the seller got it and it was because we had passed the credit approval deadline and the week before closing the buyers credit had gone down enough that their debt to income ratio was all messed up. And it was the buyer's fault and they gracefully bowed out and forfeited their earnest money to the seller.

Posted by Andrea Peters, SOLD with Andrea! (The Andrea Peters Group powered by United Home Group @ Keller Williams Realty) almost 7 years ago

Hey Patricia, what an excellent post.  Thanks for taking the time to put this together. 

Have a Big day,

Randy

Posted by Randy Shamburger, FHA, VA, USDA and Conventional Mortgage Expert (Movement Mortgage) almost 7 years ago

Pat

The earnest money deposit is a very important element of the contract process.

Good luck and success.

Lou Ludwig

Posted by Lou Ludwig, Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC (Ludwig & Associates) almost 7 years ago

Here it is common for $1000 or 5% which ever is higher. I go over earnest money with all my buyers and sellers BEFORE any transaction starts to inform them how it works and try to head off future issues. 

Posted by Scott Godzyk, One of the Manchester NH's area Leading Agents (Godzyk Real Estate Services) almost 7 years ago

Contingencies appear in most offers.  It often times seems the offers with more contingencies have less earnest money. 

Posted by Julie Brown, Broker-Associate, Mt. Pleasant, Iowa (Steffes Group, Inc.) almost 7 years ago

I have blogged extensively on earnest money and recorded a video explaining it. In my area of Tulsa Oklahoma, the typical amount of earnest money is 1% of the sales price, although in some rural areas, they just write a check for $500 or $1000, regardless of sales price. Great post - hope a lot of Buyers and Sellers read it!

Posted by Lori Cain, Midtown Tulsa Real Estate Top Producer (eXp Realty) almost 7 years ago

Pat, I really think the amount of the earnest money gets important when you're in multiple offers. Gives a little edge sometimes.

Posted by Connie Harvey, Realtor - Nashville TN Real Estate (Pilkerton Realtors) almost 7 years ago

Anything less than $1000 is considered an insult in this area.  A serious, committed buyer will offer $2000-$5000 depending on the price of the home.

Posted by Raymond Patterson, President - Patterson Team Homes (The Patterson Team @ Keller Williams Excellence) almost 7 years ago

Being earnest, accurate and available are some of the keys to customer service.

Posted by Jeff Jensen (The Federal Savings Bank/Lending in 50 states) almost 7 years ago

Earnest money in our market is either $500 or $1000. Very rarely do we see anything else.

Posted by Evelyn Johnston, The People You Know, Like and Trust! (Friends & Neighbors Real Estate) almost 7 years ago

Pat, I can see your point that a large earnest money check can show that you are serious.

On the other hand with with all of the contingencies in contracts these days, I think that the only thing that matters is the integrity and reputation of the buyer, and a large earnest money check from a shaky buyer is meaningless.

As a buyer, I look at excessive E money sitting in a real estate brokers trust account as wasted money that is on vacation rather than working for someone.

We never put any money down until the contract is accepted, and if they seller and their agent know me then sometimes we don't even waste time on it then, since they know that once I commit, I wont back out.

Of course if you are an infrequent buyer who has not developed a reputation, or someone who is going to ask for the moon in excessive contingencies, then get ready to write a huge check.

Posted by Bob Crane, Forestland Experts! 715-204-9671 (Woodland Management Service / Woodland Real Estate, Keller Williams Fox Cities) almost 7 years ago

Thank you for this post. It is difficult for sellers to get the earnest money because there are so many contingencies built into the contract to protect the buyer and the earnest money deposit.

Posted by Rosie Moore (Serving Sugar Land, Richmond, Rosenberg, Missouri City) almost 7 years ago

Rather not take a deposit of any size and tie up a property listing from dancing with another buyer. But when the deposit is zipped into the trust account, the loss of it for liquidated damages when the deal goes south happens. Should because time is money. The bigger it is, the more lawyers are attracted like flies, moths, june bugs around a porch light. The buyer found a prettier property or changes their mind about buying means good luck bringing the deal back with the paddles. Clear. But here is a little something to split with the seller to make it all worthwhile. They add up over the three plus decades of sign here, here and oh yeah, here.

Posted by Andrew Mooers | 207.532.6573, Northern Maine Real Estate-Aroostook County Broker (MOOERS REALTY) almost 7 years ago

The protocol for initial earnest money checks varies from community to community.

Posted by Jeff Jensen (The Federal Savings Bank/Lending in 50 states) almost 7 years ago

Great Post..Thanks for sharing this information with us..

Posted by Ginger Harper, Your Southport~Oak Island Agent~Brunswick County! (Coldwell Banker Sea Coast Advantage) over 6 years ago

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