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Earnest Money Deposits On Short Sale Offers - Easing Buyer Fears

One of my, "first time home-buyer clients", asked me this question: "Since an offer can take weeks to be accepted on a short sale, where does the earnest money deposit check go?"

Earnest money deposits are a sensitive topic, especially for first time home buyers. Buyers in California are required to submit a "good faith", deposit for up to 3 percent of the offer price, when submitting a purchase agreement.

To lower the anxiety level of our buyer clients we advise them to make the check out to the Real Estate Company that holds the listing contract, for the property they are submitting the purchase offer on.

We then take a copy of the check and draw a line through the account number on the bottom of the check so that it is illegible. This prevents any potential identity theft. This check copy is the one that we submit with the offer.

The original check goes back to the buyer. Taking a copy of the check and handing the original back to the buyer eases any anxiety about a check sitting somewhere in a trust account while the offer is waiting to be accepted and escrow is being opened. We make sure that the buyer understands that we will need a new check when the offer is accepted and escrow is opened.

This method also lessens liability for everyone. Once escrow is opened, several weeks later, we get a new check from the buyer and have it taken by messenger to escrow the same day.

Posted by Jane Grant - Southern California Homes - Temecula - Wine Country - Custom Homes on 03/02/2009 04:59 PM

Comments (10)

Earnest Money Deposit in the Home Buying Channel

frst time home buyer, earnest money deposit

Post is included in group: SO CAL Pass Area Communities and other Interests
Post is included in group: Realtors®
Post is included in group: Independent Brokerages
Post is included in group: First Time Homebuyer
Post is included in group: California Short Sales, REO's, and Foreclosures

10 Comments on Earnest Money Deposits On Short Sale Offers - Easing Buyer Fears

MAR

Jane, Thanks for bringing this up. So many people don't understand the process and especially first time buyers are hesitant to leave a deposit check when they are not sure when or if their offer is going to be accepted.

MAR

Holy cow, Jane... that is SO different than our typical process in Arizona. Brokers here NEVER accept an EM check that is payable to the Brokerage firm. They are always made payable to the escrow/title company, and the Buyer's agent holds the check until the contract is accepted. Once the contract is accepted, by law the EM check MUST be deposited with the escrow/title company within 1 business day. Real estate is indeed local, and it's great to know how you handle EM checks in California!

In our state Jane the title company is the third party handling the funds. I really learned a lot about this process and how it is done in California.

Hi Jane,

Deposit checks here are held by the seller's attorney in their escrow account. Especially in downstate New York, after the negotiations are done and the memo of agreement is drawn up, we can't do anything without an attorney! LOL In our area, a few years ago Coldwell Banker tried to use the attorney approved contracts (that needed to be approved by them before being deemed official) to avoid the customary 1 to 2 week delay for contracts to be drawn up. That effort was very short lived.

It is really frustrating though, to get through a difficult negotiation and have an attorney who knows nothing about what transpired, completely blow the whole deal. Thank goodness it has not happened to me personally. I do have to say that it has gotten better in the 12 years I've been practicing. I think that a lot of attorneys have finally realized that we are not adversaries. ;-)

MAR

Hi Jane- First of all, I've really missed writing you. Our brokerage and my the one I owned did not accept escrow. It the greatest source of complaints and submissions to the Florida Real Estate Commission so all deposits are held by an attorney or a title company. On short sales, we kept getting offers with "deposit submitted upon lender approval." Uh no... As a CDPE, here is what I put at the bottom of short sale listings (I also modify this for non-short sale listings too):

Listing Agents are Certified Distressed Property Experts (CDPE) and can answer your short sale questions. The short sale process has been initiated. Lender requires 1) Far/Bar "As Is" contract, 2) Letter from buyer's lender stating buyer's credit & income are sufficient for the lender to make the loan and that the funds have been verified, 3) Signed Short Sale Addendum, 4) Ernest money deposit no less than 5% of the offer price. THIS IS A GREAT OPPORTUNITY FOR YOUR BUYER!

Hugs...Greg

MAR

Hey, Jane.

I actually have to question this sentence of yours: "Buyers in California are required to submit a "good faith", deposit for up to 3 percent of the offer price, when submitting a purchase agreement."

I think that is misleading on several levels. First, neither I nor any of the investors that I know are aware of any requirement that they submit a "good faith" deposit for any amount. I've done a lot of creative investing, as do a lot of people I know down here, and getting away from having one's money tied up is one of the prime facets of creative investing.

Second, if one wanted to, one could certainly submit a deposit higher than three percent. One could even submit a deposit for the complete price of the home if one wanted to. Perhaps you mean "usually three percent of the offer price" instead of "for up to..."

MAR

Russel, I am speaking about a typical offer. Especially today, with all of the multiple offers on Short Sales. A seller will not consider an offer without a copy of an "Earnest Money Deposit". I am not speaking about "Creative Financing", or "Hard Money Loans".

I am speaking about the typical offer presented today, that a First Time Buyer might be placing an offer on, for a property using a California Association of Realtors, Residential Purchase Agreement.

MAR

Earnest money goes into a special trust account in our office. The check does get cashed. That seems very strange to make a copy of a check and then give the check back to the check writer and use the copy as proof of earnest money. That sounds on the verge of fraudulent and misrepresentation to me.

SEP

Hello Jane,

Thanks for taking my call earlier. As stated in leaving you a voicemail, I've checked with the California Association of Realtors attorney and she stated that indeed we need to hold on to the deposit check and log into trust log. If you read Item 2A of purchase contract (RPA-CA), it states that the deposit has been given to us. Jim is correct, it would be fraudulant if you give the depsit back to the buyer. However, if you wish to do so, all you need to do is change the wording on the contract to state that you have a "copy of the deposit" instead of "the deposit". If they (seller) sign that, it would still be good. Ultimately, we are trying to do the best for our clients but we must be careful of what we do for exposure of liability. The contract clearly states that currently but can be changed and as long as all parties agree on the new wording, then we are doing what our clients want.

Once again, thanks for taking your time and effort into this matter. You may wish to remind your clients that the depsit is held "uncashed" until after acceptance on the RPA-CA form.

Thanks.

Jim and Chun: Thank you both.

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