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Earnest Money Protects BOTH Buyers and Sellers

By Benjamin Clark

Real Estate Agent with Homebuyer Representation, Inc. DRE# 5467433

August 13, 2019 08:24 AM

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

Maybe a Buyer gets cold feet. Or perhaps, a Buyer ties up the property, but is ultimately unable to perform after all contingencies have passed. In these cases, the Earnest Money is widely considered to be a fair amount to pay the Seller back for the lost time on the market or other expenses and inconveniences.

However, in Utah, the Earnest Money Deposit is protection to the Buyer as well!

In Utah, Section 16 of the standard Real Estate Purchase Contract states that if the Seller defaults, in addition to return of the Earnest Money Deposit, the 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 the Buyer elects to accept liquidated damages, the Seller agrees to pay the liquidated damages to Buyer upon demand.

So, if the Seller Defaults, the Buyer's Earnest Money is returned to the Buyer AND the Seller is contractually obligated to pay an equal amount to the Buyer as liquidated damages. Therefore, when you set the Earnest Money Deposit, you should consider how much would be sufficient to cover your expenses and inconveniences in the event the Seller were to default...

If the Seller defaults, the Buyers' options are:

To accept the sum equal to the Earnest Money Deposit plus *liquidated damages and walk away, or
REJECT the money and pursue other remedies (lawsuit to enforce the contract, etc)...

If the Earnest Money amount is minimal, for instance $500, the "equal sum" may not be sufficient to cover costs of re-scheduling movers, re-instating temporary housing (if possible), etc. The buyer may have to start their home search all over. Also of consideration is that a lawsuit could drag on for an extended time and take its toll on both the losing and prevailing parties... The earnest money amount should not be decided on a whim.

Determining the right amount of Earnest Money involves careful thought and planning. At Homebuyer Reprsentation, we counsel with you and about your many options and provide you with several options that will work best for you and your situation.

Another thing to consider when determining how much Earnest Money to use is: 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 also have to consider the financial implications of backing out of a deal. If the seller has an offer for $5000 more than your offer and it will only cost them $500 to default, there is little deterrent to attempting to do so. But if it will cost them $5,000 or $10,000 to cancel out of the deal, they will be less likely to try to get out by defaulting.

If the Seller defaults, the Buyer will want to consider whether or not to accept the liquidated damages being offered by the Seller. Once the Buyer accepts the matching sum, the Buyer then forfeits their rights to pursue the other available remedies... In some situations, keeping your Earnest Money in trust and suing to enforce the contract may be your best option.

Remember Exclusive Buyers Agents do not list homes and will not ask you to limit your level of representation. They will be 100% on your side during the transaction, representing YOU, negotiating on YOUR behalf and protecting YOUR interests.

Smart Home Buyers