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Is it YOUR fault the sellers backed out on your buyer?

By
Real Estate Agent with Fantis Group Real Estate

How your earnest money advice can make or break a deal

I recently read a post from a local agent suggesting that .5%-1% of the home's value is a good earnest money amount. GASP! The agent is trying to "protect" the buyers' interests by limiting their financial exposure. The agent truly believes he is doing the buyer a favor. I disagree.

So you and your buyer finally get that $200,000 house under contract. To 'protect your client' you suggest they write a $1000 earnest money check. Now the sellers aren't excited about that, but they accept it. So far, so good.

Your buyir is steaming mad!Now along comes Suzie and Jonah Homebuyer, also looking to buy a home. Jonah saw the home (soon to be you're buyers' home,we hope) last week and LOVED it! He was just waiting for Suzie to get back from a short trip. Jonah and Suzie want the house badly enough that they offer the sellers $5,000 more than your buyer did. The sellers accept it. Have you ever heard the phrase, "So sue me?"

The sellers refuse to close with your buyers. Now what do you do? Your buyer could sue for specific performance to get the house, or they can get their earnest money back. In many states, the seller would owe them double their earnest money, too.

The sellers know your clients probably won't sue them, so they sell to Suzie and Jonah Homebuyer and put an extra $3000 in their pockets.

Here are a few other problems with low earnest money amounts:

  • it makes your clients look like they can't afford the house
  • it makes your clients offer look weak when there are competing offers
  • it makes your clients appear wishy-washy or uncertain of their decision
  • it limits the commitment of the buyers (who wants to work with buyers who make offers on things they're not sure they want?
I'm not condoning the seller's actions, I'm just saying it really happens out there. So now I'm curious, how much earnest money is "customary" in YOUR neck of the woods? And if it's different, how much do YOU recommend your buyers put down?

By the way, this really happened to me!

Show All Comments
Michael Kupper
D.R. Horton - Pflugerville, TX

Great post Tony, I recommend a 5% deposit but more commonly than not, take a 2% good faith. It is an interesting look to see the benefits of a larger deposit for the buyer. 

Mar 27, 2008 02:55 AM
Harold "Hal" Place
A1 Connection Realty, Inc. - Sun City Center, FL

Good morning Tony,

On the average we will present an offer with as little as one percent "Earnest" money. However the Contract is usually written  to include an additional Earnest" money  payment totalling ten percent off the agreed upon purchase price.

The numbers are not set in stone, every trsansaction is unique unto itself, however those are the guidelines we like to follow. 

Mar 27, 2008 02:59 AM
Steve Homer
The HBH Group (Keller Williams affiliate) - Round Rock, TX

Tony,

Although it may NOT be YOUR fault directly, it certainly becomes an opportunity for the Buyers to use you as their whipping post.  So you make a great point and this is a place in a buyer transaction where every agent should have a script that they use when choosing the earnest money amounts on an offer, to diffuse this situation BEFORE it happens.  For instance, something like:

"Mr/Mrs Buyer, as we choose the amount to place with the title company in earnest, I want you to keep in mind that this amount needs to make you seem VERY earnest to better establish your position.  Do you see why this is a really important issue?"

Or something like that where you help them grasp the gravity of the earnest money amount and how it is used to keep the seller engaged and not distracted by other "opportunities" that may arise.

Thanks for a great reminder post!
Steve

Mar 27, 2008 03:16 AM
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel
Most people give $1000 earnest money deposit for a house priced upto $300,000 but give a large second deposit within 2 weeks. If the price is higher we give upto $10,000 as earnest money deposit.
Mar 27, 2008 04:00 AM
April Hayden-Munson
Brookfield, WI
Brookfield Wisconsin Real Estate

Sad to say, in Wisconsin - $1,000 is put up in many cases.  I suggest to buyers the more the better and go for at least 1%.  When working with sellers - quite often a counter-offer is drawn up asking for more money.  Some here even try $500.   How is $500 showing any kind of good faith????

I popped by to say hi and thanks for commenting on my Blog.

 

Mar 27, 2008 11:07 AM
Christopher Benedict
BIG Realty - Collegeville, PA
AskTheBigGuy

When I first got started in this business, I have to agree that $1000 was the norm.  I have had a few people try to offer $500 and I've told them not a chance.  Now I am finally selling homes in the $500,000-$2000000 range I am feeling more confident and asking buyers to put up a larger deposits.  At a minimum I like to see at least $3000 in the deal.

Mar 27, 2008 11:19 AM
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