What is Earnest Money and How To Protect it
Updated: Aug 23, 2021
There are many different aspects involved when buying/selling a home. The contractual terms and obligations alone can fill a textbook. However, if all parts work together as intended, the pieces can work in unison like a fine timepiece. Understanding the various components of a real estate transaction in advance is important for the Buyer/Seller.
Learning on the fly, or in the midst of an intense multi-offer negotiation is not ideal. The process moves so quickly, it can be difficult to know which questions to ask, especially if you are a first time buyer who may not feel comfortable asking about these things in the moment. Our multi-part series Blog will attempt to highlight certain areas within the Residential Contract and home buying/selling process in hopes to provide some valuable insight.
What is Earnest Money?
Earnest Money is an amount of money put into an Escrow account that indicates persons ‘Earnest’ intentions to follow through with a Real Estate transaction. Earnest Money is typically held by an unbiased third party (usually the Title Company) in an escrow account. The Earnest Money is credited to the purchase of the home and is used by an Escrow officer to fund certain aspects of the home buying process.
It is often mistaken that Earnest Money is what binds a contract. Earnest Money is more of a Buyer-performance item that must be completed after the contract is fully executed. According to the Texas Association of Realtors (TAR) it has been determined that the Earnest Money (if delivered by a Realtor) should be deposited in the Escrow account no later than the close of business of the second working day after the Earnest Money is received.
How much Earnest Money that is required for the transaction is negotiable. Often it’s between 1-2% of the contract price. In certain market conditions there may be more Earnest Money required to get an offer accepted, say in multiple offer situations. Earnest Money in conjunction with a Buyer’s Option Fee, if used wisely, will help get a Buyer’s offer get accepted amidst other competition for the home.
The Title Company/Escrow Officer may use Earnest Money to fund certain aspects of the home buying process. Of course all monies will be accounted for on the Closing Disclosures, and credited towards the purchase of the home. One example that the Title Company might use the Earnest Money funds for would be to order and pay for, Home Owners Association (HOA) documents in the name of the Buyer. These HOA costs may include Entrance Fees, Transfer Fees and/or Resale Certificate costs.
How to Protect it.
Of course not everything always goes according to plan. A Buyer might find something out about the house they have put under contract that compels them to back out of the deal. It happens. Generally, one would want to do everything possible to back out of a contract during the Option Period. A well-represented Seller would know that a Buyer would be entitled to their Earnest Money less any minor Title Work fees. The Realtors will deliver the proper paperwork to the two parties. These document are important and must be signed on time, to avoid any disruption. Once this is completed, the Title Company will refund the Earnest Money, and the Buyer should receive it after a few business days.
What happens if a Seller disagrees that a Buyer is entitled to the Earnest Money and doesn’t sign the paperwork? There are certain instances within the Residential Real Estate Contract that would specifically detail where the Buyer would be entitled to a refund of their Earnest Money. Some of these specific instances include, timely delivery of HOA documents, mortgage approval contingencies, title search results, and Buyer/Seller default for performance items such as disclosures, surveys and restrictive covenants, among others.
Let’s face it, contracts despite best intentions, can’t cover everything. What if an agreement can’t be made between the parties? There are grey areas involved, and opinions can differ greatly in such unfortunate occasions. That aside, the Title Company cannot release the Earnest Money if all parties involved have not agreed in writing.
These certainly can be the times when having a professional Realtor on your side is paramount. When a standoff between a represented Buyer and Seller takes place, their respective Brokers can step-in and provide much needed expertise, wisdom and better yet, the ability to convince the parties involved that agreeing to terms outside of litigation is in everyone’s best interest. The amount of Earnest Money being held in any given dispute is generally, far less that what the wrongful party could be held liable for — including damages, attorney fees and costs of litigation.
I think we have one rule, and one motto at Blackburn Properties. I forget which is which, sorry! But one of them is to ‘Always Play Nice.’ I like that!
Ubiquitous Legal Disclaimer: The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.