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One of the most potentially drama filled zones of real estate are earnest money deposits--also known as EMDs. The big issue regards whether you can get your earnest money back simply and quickly should you decide to void the contract. Is the broker allowed to give yo--the buyer--the money back even when it is obvious you are in the right. And if you're the selling agent (buyer agent) then how to protect your buyers' earnest money in future transactions.
Let's say you're going to buy a house for 500,000 dollars. You're going to put immediately when you come to terms and have a contract. You're going to put a little bit of money down. It's part of your downpayment put into escrow in advance. This gives you skin in the game. This tells the seller that you have full intention of going through with the contract because if you default, then your earnest money deposit is at risk.
So for example with a 500,000 dollar house, you might have an earnest money deposit. Typically, it would be about 10,000 dollars. The best buyer-agents would do their best to minimize your earnest money deposits when possible, that way you have as little skin in the game as possible. That way your options are as open as possible because life is crazy and there are curve balls and you never know what's going to happen. So what happens if you're on your contract and you decide you do not want to buy the house anymore. And even if you're within a window, let's say you have a seven-day home inspection contingency and you decide the day after going under contract or three days later, you don't want the home anymore. Your earnest money has already been deposited. You have full right to get all of it back because you are not defaulting on the contract. You have a full week window for that home inspection contingency. And at that point, is it that simple to get your money back? Or is there more to it than that?
Generally speaking...and I say generally because all real estate is local along with the laws thereof. But in most states if the buyers's real estate broker wants to refund the earnest money deposit back to his client (buyer), the broker is not allowed to immediately and simply refund the money back to the buyer--even if the buyer is supposed to receive the money back and it is obvious contractually.
The real estate broker's hands are tied; he cannot refund the earnest money until he gets signatures from all parties--the buyer, seller, listing broker and selling broker (buyer agent side). A release of deposit form delineates to whom and how much of the earnest money deposit is to be released. For example if the deposit was $10,000 the buyer and his broker would insert the entire amount to be released to the buyer. Usually that happens without drama inside 48 hours. Sometimes though it is much more complicated and the seller demands a portion of the EMD such as $2500 or $5000. When this happens the broker is handcuffed practically and cannot refund the buyer his rightful money.
If the seller will not sign the release sending the money back to the buyer, then the buyer's broker must send notice in a letter to the seller stating he is going to release the funds back to the buyer in 30 days unless he (buyer's broker) receives a written protest disputing that release from the broker to the buyer. If the seller does make this dispute within that 30 day window the buyer's broker will not be able to release funds. The courts will take it from there likely in most regions.
So the earnest money would be held against the buyer's will in this situation when the seller will either not sign the release or even goes so far as to dispute the release in writing within the 30 day window. The frustration would be high as this could prevent the buyer from making an offer another home until they recovered their funds from the deposit.
How can one prevent the potentially dramatic scenario of a disputed earnest money deposit from rearing its ugly head? Much of the potential is simply prevented with an addendum to the contract up front that says all parties agree that the earnest money will not be deposited until the all parties have signed the home inspection addendum. The parties simply agree up front that no money is to be deposited until the buyer and seller have negotiated their home inspection issues and signed the ensuing addendum. At that point the money will be deposited. This is common sense and the time from ratification to completing the negotiating of the home inspection is about a week. Those negotiations can create friction or anger that could lend itself to a seller not agreeing to sign off on releasing the earnest money immediately if it had been deposited up front before the home inspection even occurred as it usually is.
Let's say you're going to buy a house for 500,000 dollars. You're going to put immediately when you come to terms and have a contract. You're going to put a little bit of money down. It's part of your downpayment put into escrow in advance. This gives you skin in the game. This tells the seller that you have full intention of going through with the contract because if you default, then your earnest money deposit is at risk.
So for example with a 500,000 dollar house, you might have an earnest money deposit. Typically, it would be about 10,000 dollars. The best buyer-agents would do their best to minimize your earnest money deposits when possible, that way you have as little skin in the game as possible. That way your options are as open as possible because life is crazy and there are curve balls and you never know what's going to happen. So what happens if you're on your contract and you decide you do not want to buy the house anymore. And even if you're within a window, let's say you have a seven-day home inspection contingency and you decide the day after going under contract or three days later, you don't want the home anymore. Your earnest money has already been deposited. You have full right to get all of it back because you are not defaulting on the contract. You have a full week window for that home inspection contingency. And at that point, is it that simple to get your money back? Or is there more to it than that?
Generally speaking...and I say generally because all real estate is local along with the laws thereof. But in most states if the buyers's real estate broker wants to refund the earnest money deposit back to his client (buyer), the broker is not allowed to immediately and simply refund the money back to the buyer--even if the buyer is supposed to receive the money back and it is obvious contractually.
The real estate broker's hands are tied; he cannot refund the earnest money until he gets signatures from all parties--the buyer, seller, listing broker and selling broker (buyer agent side). A release of deposit form delineates to whom and how much of the earnest money deposit is to be released. For example if the deposit was $10,000 the buyer and his broker would insert the entire amount to be released to the buyer. Usually that happens without drama inside 48 hours. Sometimes though it is much more complicated and the seller demands a portion of the EMD such as $2500 or $5000. When this happens the broker is handcuffed practically and cannot refund the buyer his rightful money.
If the seller will not sign the release sending the money back to the buyer, then the buyer's broker must send notice in a letter to the seller stating he is going to release the funds back to the buyer in 30 days unless he (buyer's broker) receives a written protest disputing that release from the broker to the buyer. If the seller does make this dispute within that 30 day window the buyer's broker will not be able to release funds. The courts will take it from there likely in most regions.
So the earnest money would be held against the buyer's will in this situation when the seller will either not sign the release or even goes so far as to dispute the release in writing within the 30 day window. The frustration would be high as this could prevent the buyer from making an offer another home until they recovered their funds from the deposit.
How can one prevent the potentially dramatic scenario of a disputed earnest money deposit from rearing its ugly head? Much of the potential is simply prevented with an addendum to the contract up front that says all parties agree that the earnest money will not be deposited until the all parties have signed the home inspection addendum. The parties simply agree up front that no money is to be deposited until the buyer and seller have negotiated their home inspection issues and signed the ensuing addendum. At that point the money will be deposited. This is common sense and the time from ratification to completing the negotiating of the home inspection is about a week. Those negotiations can create friction or anger that could lend itself to a seller not agreeing to sign off on releasing the earnest money immediately if it had been deposited up front before the home inspection even occurred as it usually is.
About the Author:
When it is time to search for McLean real estate work with a team that is committed to protecting you financially. Take advantage of using technology to make your search for Washington DC condos as efficient as possible. Read the blog for a ton of articles written from a consumer advocate perspective for home buyers.
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