No Adult Supervision at California Association of Realtors; Teenagers are in Control.
The entire universe requires a prospective buyer to tender an Earnest Money Deposit when that buyer offers to purchase real estate. But not in California.
Realtors everywhere believe a deposit demonstrates the prospective buyer's earnestness and sincerity, that's why it's called an Earnest Money Deposit. But CA Realtors are smarter than that; we're special.
Until recently the California Association of Realtors (CAR) Purchase Agreement was entitled: "Purchase Agreement and Receipt for Deposit". Agents referred to it simply as a 'Deposit Receipt'. But, not any more.
About three years ago our State Association modified the standard Purchase Agreement. By default, it now says the buyer promises to deliver a check to escrow within 3 days of contract ratification.
The thinking in vogue with the teenagers in charge of forms is that we're in a digital age of online banking, wire transfers and digital signatures. Deposit checks are an old-fashioned remnant of a bygone era. Getting a check is now regarded by CAR as a waste of time because the offer may not be accepted. Why waste time getting a deposit since the buyer can deliver the check, or wire the funds, if their offer is accepted? Why do today what can be put off until tomorrow and then done with less effort, if necessary? 
The problem is obvious to experienced listing agents; some "buyers" don't deliver the check as promised. Not often, but it happens. It has happened to me on my listings more than a couple times. The buyer just enjoys the thrill of the negotiating offers and counter-offers, I guess. When the offer is finally ratified, the check isn't delivered to escrow as agreed. The buyer changed their mind, after contract ratification. There is no recourse for the seller except to re-sell the property and hope that multiple offerors, if any, are still interested.
Asset managers and REO agents know this happens. It has happened to them. That's the reason they require the Selling Agent to be in possession of the deposit check. They negotiate hundreds of deals each year. But somehow the CA Agents, who probably average 3-6 listings per year, know more than the asset manager who sells two and three times that number each month. But teenagers always know best, don't they?
When this happens, when the check is not delivered as promised, the Seller can't quite believe they're dealing with professionals. No amount of persuasion can convince them California Realtors are not "Amateur Hour" contestants.
The Seller needed a deposit when they bought the home. And doesn't the offer of generous compensation to the Selling Office include them getting an Earnest Money Deposit from the buyer with the offer? Even if it turns out for naught. It used to, and it does in the rest of the country. It should in CA. But we're special.
What the teenagers don't understand is that there is a gut-level reaction when a prospective purchaser writes a check for a large amount of money (customarily 3% in Silicon Valley) and hands it to their agent with a signed purchase contract. A light goes off and their brain says: 'This is important and serious, it's not a game...pay attention'. That was true in 1976 when I first observed a buyer's reaction when I asked for and received a Deposit check, and it's still true today.
Technology has changed many things, but not our emotions about putting a large sum of money at potential risk. Then and now, it focuses one's attention and lets us know we're entering an important negotiation. That's the purpose of an Earnest Money Deposit. Without that check those feelings are absent.
It's my hope some grown-ups at CAR read this post.
Lloyd Binen
Realtor/Broker/DRE 572654
Certified Realty Services
19200 Shubert Drive
Saratoga, CA 95070-4046
Certified Residential Specialist (CRS); Graduate, Realtor's Institute (GRI)
408-373-4411; e-mail
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65 Comments on No Adult Supervision at California Association of Realtors
Sandy, thanks. I'm more interested in the buyer's sincerity than guarantees. A deposit written and signed and given to their agent with the signed offer demonstrates sincerity.
Thanks Kwee. Have a good weekend in Florida yourself.
Hi Bryan, I do understand that the buyer's promise is the consideration needed for contract formation, not the deposit. I don't want a deposit for consideration, I want it to demonstrate that the buyer is earnest.
Satar, all I can do is repeat: there is no 3-day rule. Read the contract, sir.
Larry and Sheila, yeah NY is very different from CA. I know you had a seller change their mind about selling between the offer date and attorney's contract date. Do you also have buyers change their mind after the offer is accepted, but before the attorneys create the contract? What happens if you get a second offer after the first one, but before the attorneys ratify the contract? Does that happen?
Hi Anja, it wasn't that long ago that the selling agent would tell the buyer that the offer wouldn't be presented until the buyer delivered a check to the selling agent. That's what the CAR purchase agreement said. Things change although I think it reduces the level of service we provide to the public.
Did you attend the Garlic Festival?
Yes Lloyd, that can happen and it all depends how the seller wants to proceed. We don't like it when a second higher offer comes in after an accepted offer, but it's up to the homeowner and their moral beliefs...
Hey Lloyd I'm sure by now you know this was a well preceived post and I am happy that Pat picked it as a favorite or I would have missed it...
In NY we still have Lawyers so we don't have this issue to deal with. I would however, still prefer having it and not having to deal with the lawyer issues that we deal with all the time... Have a great day!
Lloyd: I've always asked for a deposit check to be made out to the escrow company, then sent a copy of it to the listing agent with the offer. The understanding is that I eiher give it back to the prospective buyer if the offer doesn't fly, or to the escrow company to open escrow if it does--I guess now within 3 days. Out of town offers? That's where the 3 day rule helps because chances are I don't have a copy of the actual check when writing the offer. Nice discussion.
Hi Lloyd -
I see your point. You have stated a great reason. Personally, as a broker I welcomed the change though. It is only the default in the contract and you can modify it. I know that usually the default becomes standard practice and for this I must admit I am grateful also. Every check must be logged and kept safe, and as a broker I find it tedious and burdensome. Sorry. Especially in this foreclosure/bidding war/no inventory environment where you are lucky to get an email telling you your offer is rejected. Holding a check becomes another tedious paperwork issue and most of my agents work from home. It gets ridiculous that they have to make a trip just to bring in a check on an offer that will land in a pile on a desk. Also, I hate the convention of sending a copy of the check -- too much personal information.
Besides, if the check doesn't arrive in 3 business days (default again - it can be modified) you know you don't have a deal. Even when most of the transactions I dealt with had the broker holding the check I've had buyers pull out and the check never arrived, or the check arrived "slowly" to escrow for whatever reason. Psychologically speaking you're right it can make people see that it is "real" however after they've written on 10 foreclosures and they are 1 of 20 offers -- the act of writing yet another check tends to lose its impact too. Or, they are just reusing the same check on subsequent offers -- so they aren't writing a new check for that particular offer anyway. I think the change is a sign of the times and a reflection of current market conditions in much of CA.
You can always require it of buyers or offer it when representing a buyer though. It's just another box. You are right it is a reduction in service -- so much of our industry is being impacted in terms of service provided. We are so busy dealing with bank hoops and speed bumps lately. Right now I am providing so much service on other bank related issues, a deposit check seems like a small thing to go by the wayside.
Great topic, blog and discussion!
Tni
Hey, Lloyd! I included this post in Last Week's Favorites. Have a great week!
Richard and Beth, thank you. I've been learning about NY customs in AR posts and comments. We try to keep attorneys away from our transactions unless it's a complex and unusual transaction.
Hi Hella, yes that's the traditional way of handling the Earnest Money Deposit and the way I which was still the norm. I think it provides the level of service that the public expects and deserves. By "3-day rule" are you referring to the buyer delivering the deposit within 3-days of acceptance?
Hi Tni, thanks for your thoughtful comment. We both understand the issues. I believe that the listing agent's offer of compensation includes the selling agent receiving and properly handling deposit checks. Yes, it's a bit of a hassle and current market conditions make it harder, but that's part of what brokers get paid for. Properly trained agents and good office systems & support staff make it easier. A seller who accepts offer #2 on day #4, after no check is delivered by buyer #1 could cause legal problems if a Release isn't signed by buyer #1.
Hope all's well in the central coast.
Hey Pat, thanks and get some sleep.
Where I live there are often multiple offers on one property, so why cough up the check until the offer is accepted? I would spend half my time getting people's money back. The seller really has no security in this case with 20 offers and 20 earnest money checks, giving 19 back. It is NOT like the "old days" though when the contract would not even be reviewed without a check.
Well written and well constructed post Lloyd, you deserved the star on this one. I try to convince my buyers to include a deposit check with offers...locally, it's only 1%. Lately, it's a promissory note. Frankly, that's why people walk, I wish there was more of a "hit" for those buyers who play without wanting to pay....
Nan, is it possible that you'd get your offer accepted in a multiple offer situation if your buyer showed more earnestness by having written and given you a check with their signed offer? Doing any job thoroughly is always more work than cutting corners to save time and effort.
Debb, thanks. I agree, and to my thinking every serious real estate professional ought to agree with your sentiment.
We haven't used notes or "irrevocable escrow demands" since the 1970s.
Thank you for your response Gov. I earnestly appreciate it and am pleasantly surprised anyone from CAR responded, especially you, the head of the Legal Division. Thank you. We've met and I'm registered for your Monday morning Legal Presentation in Menlo Park. I try to never miss them. CAR Legal and Leslie's Econ Division are great services to us CA Realtors. They're the greatest benefits of being a Realtor. CAR has helped my business and benefited my clients-indirectly- for many years.
I understand your response and I appreciate it. Every constituency benefits from the change, except one. The people who pay us all--our sellers. And they had no input.
Mega-Brokers are relieved from lots of Earnest Money Deposit record keeping. So they like it.
The Brokers who got licenses via 4-year degrees don't know how to process an earnest money deposit. That procedure is learned as a sales associate working for a reputable broker, something they've never experienced. So they like not handling deposits, too.
The Rebate Firms can't afford a manager to supervise deposit handling. The money they need to pay a branch manager is rebated to the buyer instead. So the Rebaters would rather change the industry standard for handling Earnest Money Deposits than have their business model (and business) collapse. So they can't handle deposits and needed the change for their business survival. (In a sense, the seller is paying a brokerage fee that used to include handing deposits. But the discounter gives some of that money to the buyer and doesn't do all the work to earn that full commission. So the seller is short-changed.)
None of the Brokers who were primarily doing mortgages, but now sell RE, know how to handle a deposit. They're afraid of deposits. For years we got purchase contracts from them that said they received a deposit check, but they really didn't. That was prevalent. (Is "honesty" part of Agency Law?) So these former mortgage brokers are also happy to not handle deposits.
Finally, all the honest, hard-working agents who work primarily with buyer clients have never encountered the problem I'm referring to. So they didn't object to the change, it's less work for them.
The only constituency damaged by the change didn't get any input; that's our seller. The people who pay us all. For them it's a reduction in the level of professional service provided by our industry. But their input wasn't gotten. They're not really aware of it, or its implications. We made the change to benefit us. Does the industry have a Fiduaciary to the public? I guess not.
I'll see you Monday in Menlo. (I'm not a heckler.) And thanks again for your comment, I appreciate it.
Hi Lloyd ~ It's pretty cool that your post was commented on by the head of the CAR Legal Dept! I hope you get them all straightened out.
Maureen, I was very pleasantly surprised my post got Gov's attention. I'll probably write a post about it--the power of AR. I'm registered to attend a legal class he's giving tomorrow in Menlo Park.
LLoyd I don't collect earnest money. Money is collected at the signing of the contract which is drawn up by the seller's attorney.