Earnest Money - Important News for Both Buyers and Sellers!

By
Real Estate Broker/Owner with RED Properties NC #129285

Earnest Money - EMD - Deposit - whichever term is used in your locale it is extremely important to know what it is, what it is used for and what the appropriate amount is.  I will use real life to demonstrate the importance of educating other professionals, buyers and sellers the necessity Earnest Money.

I have a buyer couple from out of state.  They are the nicest, most hard-working, upstanding people that you would ever want to be around.  They placed their property for sale in the "other" state with Agent X so that they could start the preparations for the move to North Carolina.  It didn't take long.  Agent X received an offer from Agent Y that was representing the buyer.  The initial offer came in with $0.00 Earnest Money.  Let me put that a few other ways for you to understand.  ZERO - $o.oo- zip, zilch, nada. 

I was not privy to any of the negotiations with their "other" property as things happened literally within hours.  Their agent, Agent X, countered with earnest money of $300.00.  Again, for emphasis, THREE HUNDRED DOLLARS!  I did not know any of this.  When I would ask my buyer any questions they said that their agent was handling things beautifully.  Okay.

We find THE house in the Wake Forest area.  I mean THE house!  Their property is under contract so all is contingent.  Before writing our offer I informed my buyer that I needed a copy of their Offer To Purchase for the property in the other state.  I wanted to be sure that the contract looked good and, of course, had to have it when we submitted our offer. 

Agent X obliged and emailed me the contract.  I was FLOORED when I reviewed it.  I immediately called my buyers (Agent X's sellers) and asked if they understood what the earnest money was for, what did they know about the buyer, were they pre-qualified or pre-approved, etc.  I then explained that if the deal feel apart and provided the stars aligned perfectly that they would only be entitled to $300.00.  Again, I was informed, no worries - "Our agent is great and this is solid."

Once my buyers had reviewed the information that I gave them by way of comps, etc they were prepared to make their offer.  When it came to Earnest Money they were floored.  I explained to them that customary for our area is 1% - 3% of the purchase price.    They couldn't understand why.  I explained to them what earnest money is for.  It can be viewed as "good faith".  It can convey a level of seriousness.  By putting up a larger amount of earnest money it shows the seller that you are serious about buying their house.  It also indicates that you have taken the steps necessary to be pre-approved since you (as the buyer) may lose that money should the deal fall through.  It is a level of commitment to the process.  It is an indicator of your intentions.

Once it was explained my buyers understood completely and were now kicking themselves for not asking for much more in their transaction with Agent X and Agent Y. 

Moving forward, all seems to be going along quite well with one exception.  There was minimal communication between myself and Agent X.  Not due to a lack on my part.  I emailed, I called and I even sent up smoke signals - nothing in return. 

First closing date of July 10 approaches.  My buyers lender says it's a "go" for closing.  FINALLY I hear from Agent X and I am told that there were a few hiccups.  Okay - we've all dealt with those - they happen.  We pushed the myspace code

 

closing to the 18th.  Two days prior I find that they are no longer hiccups but belches.  It would seem that the buyer in the other state had decided it would be okay to buy major purchases and write some not so worthy checks prior to closing.  Yikes!  The deal was pushed to a Mortgage Broker that claimed "I can get any loan through."  Well, guess what?

DENIED!  By TWO LENDERS and a Mortgage Broker!

My buyers deal has flopped.  For all of my buyers troubles they "might" get $300.00.  That's it!  They now CAN'T move to NC and the husband will have to call Monday to decline the position he was offered here.  Not only can they not buy the house but their life has been dramatically alteredWill my buyers lose their $1500.00?  Technically, they should.  However, the other agent here and myself have been in very close contact and they have been a dream to work with.  There may be a chance that it will be returned to my buyers.

So, to whomever is reading this, whether buyer, seller or fellow agent - PLEASE be sure you understand every piece of an Offer To Purchase and the consequences should a deal not go through.  Don't let any agent rush you through a contract - take all the time you need to really understand it!

As for me and my buyers?  We'll figure something out - that's what I am here for.  I have listened to numerous tearful phone calls this afternoon.  It was my job to tell them that we will work through this.  Just because this deal didn't work doesn't mean that their aren't alternatives. 

Be educated, be wise and play nice in My Back Yard....

Posted by
 RED Properties RaleighRed
RED Properties RaleighRed

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Ambassador
1,881,162
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

Leesa, this is a perfect example of what a contract is for. It is the rules for what to do if things go wrong. Excellent example you've given on the definition and meaning of earnest money.

Jul 29, 2008 11:21 AM #1
Ambassador
700,443
Lee & Pamela St. Peter
Berkshire Hathaway HomeServices YSU Realty: (919) 645-2522 - Raleigh, NC
Making Connections to Success in Real Estate

Hi Leesa, feel your pain on this one!  I received an email here in Raleigh from a lender with Sun Trust.  They have a new home to home package (aka bridge loan).  I've not looked into it in detail but it might be helpful for your kind folks.  Since there home sold so quickly the first time perhaps it'll do so again.  Let me know if you'd like his flyer he sent around...

Raleigh Realtor - Pamela St. Peter

 

Jul 29, 2008 11:58 AM #2
Rainmaker
635,293
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Gary - You are absolutely right - I just want to get the point across that contracts need to be explained and NOT RUSHED through.

Pamela - Thank you so much!  That is exactly what we are all on the phone looking into tonight.  If you don't mind I would love the flyer - can you email it?

Paddy - I gotta be honest - you SSOOO lost me.  So, NY has NO earnest money or deposits?

Jul 29, 2008 12:07 PM #4
Rainer
42,621
Craig W. Barrett
RE/MAX 100 - Hughesville, MD
Hughesville MD Real Estate

Excellent piece Leesa - The only thing that is enforcable is within the four corners of the contract. If it's not understood what's contained within those four corners; how each party must perform; what happens when one party defaults; or even what constitutes a default, what's the value of the agreement? It's too bad your clients learned the hard way.

Jul 29, 2008 12:13 PM #5
Ambassador
342,395
Paddy (Patricia) Pizappi
Better Homes and Gardens Rand Realty - Pine Bush, NY
Real Estate Associate Broker Hudson Valley NY

I am really a dork today Leesa I deleted everything.  I am going to bed.

Jul 29, 2008 12:41 PM #7
Rainmaker
142,685
Cristal Drake
Prudential California Realty - Fullerton, CA
Realtor - Fullerton Real Estate

Wow, where do I even start to respond?  $300 bucks?  I am floored.  The words "this broker can push any deal through" are ringing in my ears.  NO BROKERS HAVE PULL ANYMORE.  That is just about all I have to say about that.  I don't care the the heck you are! I am sorry Leesa. What a bummer.

Jul 29, 2008 01:22 PM #8
Rainer
105,729
Teresa Harris
Lake Real Estate, LLC - Denver, NC
Denver . Lake Norman . Charlotte

OMG, you have had a DAY. Glad Pam chimed in. I was talking to my BIC a few weeks ago about a bridge loan and he said he really didn't know anyone off hand that offers them. The mortgage business has changed so much in the last six months. I am glad Sun Trust has a program like that. Thank you!! And GOOD LUCK LEESA!!

Jul 29, 2008 01:37 PM #9
Rainmaker
645,612
Susan Mangigian
RE/MAX Preferred, West Chester, PA, RS152252A - West Chester, PA
Chester & Delaware County Homes, Delaware and Ches

Leesa, what a sad ending to your story.  In PA, it used to be traditional to put 10% down in earnest money.  Now, we are usually good to go with a flat $10,000 for a sales price up to $500,000 or so.  More if it's a bigger home.  Sadly though, even if you have the full 10%, in most cases the buyer gets the money back if the seller hopes to put the house back on the market and move on.

Jul 29, 2008 02:03 PM #10
Rainmaker
1,640,733
Bob "RealMan" Timm
Ward County Notary Services - Minot, ND
Owner of Ward Co. Notary Services, retired Realtor

Thanks for the post Leeza. Although I'm a relatively new agent I've seen earnest money amounts as low as $100.00 and even a few promissory notes as earnest money.

Bob

Jul 29, 2008 03:01 PM #11
Rainmaker
575,553
Terry & Bonnie Westbrook
Westbrook Realty Broker-Owner - Grand Rapids, MI
Westbrook Realty - Grand Rapids Forest Hills MI Re

I think the contracts are generally in favor of the buyer and in most cases the earnest money is difficult for the seller to retain.

Jul 29, 2008 03:32 PM #12
Rainer
73,686
Pam Pugmire
Silvercreek Realty Group - Meridian, ID
Meridian Idaho Real Estate

This is a great tutorial about Earnest Money.  I hope all goes well with you and your clients.

Jul 29, 2008 05:23 PM #13
Rainmaker
631,147
Don Rogers
Keller Williams Realty Chesterfield - O'Fallon, MO
Realtor, Broker, CDPE, GRI, OnullFallon MO & St Charles County MO homes

Leesa,

Why is it that folks think they can buy a house with less money down, earnest money, than they can buy a used car for? Jus don't make any sense to me.

Don R.

Jul 29, 2008 10:32 PM #14
Ambassador
3,680,834
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Leesa, in DC, the amount is about 5%, and sometimes you can get sellers to take less.  But $300?  That's a few gas tank fill ups!  Sorry about your buyers!  Bummer!

Jul 30, 2008 02:36 AM #15
Anonymous
Alex

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Jul 31, 2008 08:02 AM #16
Rainmaker
635,293
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Hi everyone!  I was away for a day but I wanted to thank you for the wonderful comments!  The main point I wanted to get across with this post is that whether you are representing a buyer or a seller it is of utmost importance NOT to take anything for granted!  We read these contracts every day - our clients DON'T!  If you are representing a seller then look out for their best interests!  If you are representing a buyer then have their best interest in mind! 

As a buyer or seller as you read this.  Remember, don't sign anything until you fully understand it!  Take your time to read everything and DO NOT be afraid to ask questions!

Jul 31, 2008 11:06 AM #17
Rainmaker
123,040
Marie Westerman
Blanchard and Calhoun Real Estate/ Wilson Parker Homes - Evans, GA
New Homes Sales Specialist Evans GA REALTOR

Leesa OWSOME post!!

How do you find the time to write such great content rich stuff ALL THE TIME?

Aug 04, 2008 10:23 AM #18
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RED Properties - Raleigh NC Real Estate
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