Earnest Money
 When a purchase offer is submitted by the buyer to the seller for the seller's
consideration, it is customary for the buyer to pay "earnest money" that is deposited with a real estate
broker agency or other third party, agreeable to
the buyer and seller.
The purpose of earnest money is to show the seller that the buyer is "earnest" about closing the transaction.
The amount of the earnest money varies with local practice, but often is 1 percent to 5 percent of the purchase price.
Look at it this way: Who would you take more seriously on a 200,000 offer, a person who puts up $1,000 in earnest money or someone who offers $5,000? The more you put up, the more assured you are of getting the offer accepted.
On the other hand, you of course would not want to put up a larger amount if you at the same time were expecting the seller to pay your closing costs for you. That's because the seller would get the impression you have the money to pay your own costs if you wanted the house bad enough.
So what happens to this money?
When the earnest money check is provided to the buyers agent (which is required when an offer is made), a xerox copy of the check is attached to a receipt addendum and the purchaser will receive a copy of this receipt for their records. This same receipt is xeroxed and a copy of it and the check will accompany the offer.
Within 24 hours after an offer is accepted, the actual check then must be turned in to the broker or closing agent, by the buyers agent. That money is then placed in trust in the name of the purchaser and will be applied to any funds due at closing by the purchaser, and any or all excess refunded to the purchaser when the property closes.
Buyer defaults.
There is always a lapse of time from the date that the offer is signed by both parties until the closing date. If the buyer unreasonably refuses to complete the transaction, he or she may be obligated to forfeit the earnest money to the seller. This can be viewed as compensating the seller for the fact that the residence was "off the market" and unavailable for sale from the date that the offer was accepted until the date that the buyer refused to complete the transaction. Keep in mind, during this time, the seller may have had to make another monthly mortgage payment.
On the other hand, if it is the seller who unreasonably cancels the transaction, the earnest money is returned to the buyer. If the agreement is completed, the earnest money is applied toward any closing expenses the buyers may be expected to pay.
What conditions create a Buyer default?
Simply put, it is when a buyer "voluntarily" elects not to proceed with the transaction. The key word is "voluntarily". In other words, the buyer has no legal or reasonable justification to withdraw an offer such as loan denial, low appraisal, inspection phase reached an impass, a principals health or financial posture abruptly changed due to no fault of his own, the propertys condition has become degraded since the offer was made, etc. These are all third party actions/conditions not directly influenced by the buyers actions, and thus, the buyer could terminate the contract, and expect to receive a refund of the earnest money.
When earnest money is to be returned, a recession addendum should first be mutual signed by both parties and submitted to the entity holding the trust account funds for the transaction.
Allow up to 10 days, if a refund is due.
Should this explanation be unclear to you, please ask your agent to clarify. |
|