What Role Does Earnest Money Play in Purchasing a Home?


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 have an unfortunate example that can answer those points and show the necessity of 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 days.  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 NC area.  I mean THE house!  Their property is under contract so our offer would be 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 to attach with our contingent 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 might only be entitled to $300.00.  Again, I was informed, no worries – “Our agent is great and this is solid.”

Once my buyers and I had reviewed the information that I researched by way of comps for the home here in Wake Forest, etc they were prepared to make their offer.  When it came to Earnest Money they were floored.  I explained to them that customary amount 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, it all seemed 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 5 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 10th.  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 or seller – 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.

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