Good Advice for Buyers - Memo Your Earnest Money Check

Good Advice for Buyers - Memo Your Earnest Money Check

I had a good and productive discussion with a CPA friend today about steps a real estate purchaser should take in order to protect themselves at the time an offer with earnest money is drafted and presented to the seller.

This CPA advised that the buyer should always memo the check (in the lower left-hand corner of that check, above the ABA routing number and to the left of the signature line) with the address of the property being purchased and probably the offer date as well.  For example, he suggestst that such a memo might read, "Earnest Money 1234 Promise Road, LaPointe WI 4-1-16".

Mortgage lenders typically require a photocopy of the earnest money check at the time a file is opened on a new purchase. We see a lot of earnest money checks with no identifying memo on them. 

Another common buyer error is making the earnest money check payable to the name of the listing brokerage, without adding the words "trust account".  Of course, the listing broker knows that these client funds belong in their brokerage trust account, but it's possible to confuse the buyer (or the buyer's tax preparer) who goes back and reviews their purchase documentation after the sale.

If the IRS or state tax authority asks to review a transaction in the future, they will need clear and readily understandable documentation of the items paid by the buyer.  Adding a proper memo to the earnest money check and making sure the payee is a brokerage trust account will surely help.