The earnest money deposit that the buyer furnishes along
with a written offer to purchase property is intended for just
what it says -- to prove the buyer is in earnest. In some
areas it's still called "hand money", taking the place of the
ceremonial handshake that sealed a bargain.
A sales contract can be binding, though, with no earnest
money deposit at all. The buyer's offer to purchase, and the
seller's agreement to sell, constitute enough "consideration"
to make for a valid contract. But most sellers would think
twice about accepting an offer that was unaccompanied by a
deposit. It'd just be too easy for the buyers to change their
minds and skip town, leaving the seller with a house off the
market, extra expenses, and loss of time.
Even when no real estate broker is involved (particularly
when no broker is involved) the buyer is well-advised not to
give the money to the seller directly. Occasionally sellers
have no idea about their obligations while holding someone
else's money. They've even been known to assume it's already
theirs, and spend it. If the deal falls through, problems
could arise.
Real estate brokers do understand their obligations.
State laws require them to hold other people's money in
separate escrow, or trust, accounts. Lawyers follow similar
rules, and where no broker is involved, buyers may want to
deposit earnest money with their own attorney, or failing
that, with the seller's lawyer.
The purchase and sales contract usually contains several
statements about the deposit: who will hold it, that it will
be applied to the eventual down payment, and most
particularly, under what circumstances it will or will not be
returned.
If the buyer backs out for no good reason, it serves as a
convenient source of damages for the seller, and sometimes for
the broker who has expended time and energy on the
transaction. If the contract says it will serve as
"liquidated damages", that's all that will be expected from
the defaulting buyer. Otherwise, the seller may pursue
further recompense.
The deposit is usually returned if the seller backs out
and refuses to sell. If the seller is unable to deliver clear
title. And most often, if certain contingencies (happenings)
listed in the contract don't occur. The buyer, after a
sincere effort, may not be able to obtain the stipulated loan
needed for the purchase. A professional inspection may not
produce results the contract says must be "to the buyer's
satisfaction."
A prudent broker will not take responsibility for returning
the deposit without the seller's concurrence, or direction
from the seller's attorney. In that case, the buyer might end
up in small claims court, trying to shake it loose. If a
dispute drags on, sometimes the broker will place the money
with a court, pending an agreement or a judgment on the
matter.
Published: June 28, 1999
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