It will be very easy for you to think I have gone nuts if you only read the first one third of this Article. Please read on. You can't hardly watch television any more without seeing a commercial that features some former sports figure promoting home equity loans of up to 135% of value. NAR has already pointed out that IRS has concerns over such loans and disallows interest deductions on home loans that exceed market value. So one would have to ask: What has that got to do with earnest money? To which I say: A bunch!

Here's the situation. A buyer puts up $1,500 as earnest money. Tradition supports that if the buyer does not perform, they loose their earnest money. After acceptance, the buyer hires a home inspector for $400.00, gets the property appraised for another $350.00, pays for Credit Report for $50.00 and has to pay off a small loan of say $1,800.00 in order to meet the terms and conditions of the loan. Our buyer has spent $2,600.00.

At closing, or a few days before, the seller learns that their home is over encumbered and they need to bring a check to closing for $14,500.00 in order to close. Our seller doesn't have the money and can't close. Tilt! The buyer just took a loss of $2,600.00 as the monies spent for expenses is not recoverable. Yes they get the earnest money back, but not the expenses.

Sellers are not for the most part, considering these home equity loans as a lien on the property. They borrowed the money to pay off debt and buy a new car. Most were not told about the down-sides of getting home equity loans that over encumber their property. Such as the IRS problem or that they may not be able to sell their home for a few years. So what's the point? In the above scenario, picture yourself as the buyer broker. One who as a matter of law must protect and promote the interests of their client. Did our buyer's agent look or ask about an over-encumbered property? Was there a reasonable attempt to discover the potential insolvency of the seller? Did the seller's agent do their job?

The answer to those questions have seriously modified my thinking about buyer's earnest money. I have asked several attorneys what they thought was reasonable earnest money for a buyer's agent to ask for. For the most part, they seemed to agree that the anything over $2,500 might be putting their client at an unnecessary risk. When I offered the facts above, their eyebrows hit their hairline and their chins were scratched with vigor.

New questions on earnest money include: Where is it written that only the buyer put up earnest money? What is earnest money for? How much earnest money is too much? Should a buyer's agent be asking the seller to match earnest money?

I couldn't find anything anywhere, stating that earnest money was a requirement for a buyer in making an offer. In fact, earnest money isn't even part of the valid consideration in a contract, as that is contained in the promise to pay the purchase price.

Years ago, we didn't have home inspections and we didn't have commercials on TV that encouraged sellers to over-encumbered their property. We didn't have all the variables that now frustrate the ability of either party to close. Most certainly we didn't have the burden to protect the buyer as we always worked for the seller.

So life was simple. I used to be thin and have hair. Unfortunately, times have changed. One might even say that we have gone through a metamorphous. I'll never forget John Reilly in 1986, as he was on stage trying to tell 500 agents about buyer brokerage. He has been known to describe that experience by referring to the arrows in his back as he left town. The 17% mortgage rates were declining and then here came John with these things called fiduciary duties and buyer brokerage.

The time has come for all of us to rethink some of these earnest money issues. To obtain competent legal advice. To take to heart, our obligation to protect and promote the interests of our client. I foresee the amount of earnest money from a buyer being reduced significantly. And yes, I even see the potential of offers that would require the seller to put up earnest money.

Are we having fun yet?

Published: November 16, 1999

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