How Earnest Money Protects the Buyer

Most people think of Earnest Money only as a protection for the Seller.

In some cases a Buyer gets cold feet. Other times, a Buyer ties up the property and is ultimately unable to perform after all contingencies have passed. The Earnest Money is widely considered to be a fair sum, to pay the Seller back for lost time on the market or other inconvenience.

What many Buyers do not know, however, is that: In Utah, the Earnest Money Deposit is also a protection to the Buyer.

In Utah, Section 16 of the standard Real Estate Purchase Contract states: "If Seller defaults, in addition to return of the Earnest Money Deposit, Buyer may elect either to accept from Seller a sum equal to the Earnest Money Deposit as liquidated damages, or may sue Seller to specifically enforce this Contract or pursue other remedies available at law. If Buyer elects to accept liquidated damages, Seller agrees to pay the liquidated damages to Buyer upon demand."

So, if the Seller Defaults, the Buyer's Earnest Money is not only returned to the Buyer, but the Seller is contractually obligated to pay an equal amount to the Buyer as liquidated damages. Therefore, when you set the amount of Earnest Money, you may want to consider how much would be sufficient to cover your costs in the event the Seller were to default...

In the instance of a Seller Default, the Buyers' options are:

1. to accept the sum equal to the Earnest Money Deposit and walk away, or
2. REJECT the money and pursue other remedies (lawsuit, etc)...

If the Earnest Money amount is minimal, the "equal sum" may not be sufficient to cover costs of re-scheduling movers, re-instating (if possible) temporary housing, etc. etc. And a lawsuit can take its toll on both the losing and prevailing parties... Determining the right amount of Earnest Money involves thought and planning.

If the Earnest Money is substantial enough, it could keep a Seller from backing out of the deal.

Just as many Buyers feel compelled to follow through with a transaction because of the amount of money they will lose if they default, Sellers will also have to consider the financial implications of backing out of a deal. If it will cost the Seller $500 to cancel (by default), they just might do it. They may have an offer for $3000 more just waiting to be accepted! But if it will cost them $5,000 or $10,000 to cancel out of the deal, they will likely spend a lot more time thinking about it, and will be less likely to choose that option. 

If the Seller Defaults, the Buyer may wish to consider whether or not to accept the liquidated damages being offered by the Seller. Once accepted (deposited, etc.) the Buyer forfeits their rights to pursue the other available remedies...

In any case where the Seller chooses to default and pay the "equal sum" to the Buyer, they are gambling that the Buyer will take that money and not reject it and sue the Seller to force the sale, or to pursue other remedies.

As your Exclusive Buyers Agents, we protect your best interests. We make you aware of your options and give you the information you want and need to empower you to make the best (informed) decisions throughout your homebuying experience.

Homebuyer Representation, Inc. is a Real Estate Brokerage that services Salt Lake City, Utah and surrounding areas. Agents are Exclusive Buyer Agents (EBAs) and represent BUYERS ONLY. For Free Reports or a Free Consultation, contact Homebuyer Representation at (801) 969-8989 or click the highlighted links in this paragraph.

©2007 Homebuyer Representation, Inc.