Earnest Money and You
Not to long ago a TCI member asked
Question: Upon signing a contract to purchase from a seller, I don't understand exactly how the earnest money deposit works. Again, if this question seems stupid to you, my apologies. Here is my problem in understanding this issue. Do I actually physically give the deposit to the seller? All the info I have read would suggest this, but I have also heard from people in other forum state that you should NEVER give ANY money directly to the seller, but rather, put the earnest money deposit in escrow. If I physically give the deposit to the seller, how do I put it into escrow? Am I supposed to rely on the seller to do this? I don't know if I'm missing something here or what, but that seems to me contradictory?
Answer: Earnest money is simply a good faith gesture when making an offer to purchase property
You should make your "earnest money deposit" large enough to display or give the impression that you are serious, but avoid placing significant funds at risk.
When making earnest money deposits the contract should state amount(s) to be paid, when the payments are to be made, whether the money will be held in a trust (escrow) account, who will hold it, whether it will be credited against the purchase price at closing, and what may happen to it if the transaction does not close.
Normally earnest money is held by real estate brokers or real estate attorneys in non-interest-bearing trust or escrow accounts.
Do be aware that if you allow earnest money to be held and deposited by a you risk the seller not being able to return it to you in the event the transaction does not close.
If there is a dispute between you and the seller over the return or forfeiture of an earnest money deposit, the broker or attorney must continue to hold the funds in trust until you and the seller resolve the dispute in writing or until a court decides the matter.
Question: That brings me to my next question. When I open escrow, do I have to pay for this up front, or can I pay for it once I get paid after closing? Or better yet, is this something that my end buyer ultimately pays for? Will the Title Company act as the party holding the escrow account?
Answer: Yes you will have to pay upfront normally.
You can place terms in your purchase agreement that the earnest money check will not be deposited till all terms of the contract have been met.
For example:
Subject to partners approval
Subject to partners inspection
Subject to loan approval
Yes some title companies can hold your earnest money in trust.
Question: If I assign my contract to another rehabber/investor, is there a way I can go about doing this without my seller being able to see in the paperwork, the fee that I am collecting for the deal? I'm not sure if I want to do simultaneous closings, at least if I can help it. If there is no way to get around my fee being documented and visible to the seller on an "Assignment", how would I go about explaining this to my seller in order to relieve any worries, doubts, or fears that they may have to get them to close the deal successfully?
Answer: You will need to place in your purchase agreement this statement and or assigns.
Your fee agreement has nothing to do with the seller. You simply sign an assignment agreement between you and your buyer.
Normally the title company will do is what is called an open close, in other words you will close with your seller and they keep the title open and then close with your sell to another investor, I like attorneys to handle this type of transaction.
Good and timely article John.
An additional point I'd make is this: Please, when using an agent to make an offer for you, have the agent totally clarify your rights regarding what happens to the escrow money !
It's been some agents' and their agency's policy to hold that escrow in their office...and I've seen a bunch of these go sour, with the agent or broker being way too slow to get it back to the buyer-offeror if and when his offer was rejected. Not good but true.
Now, in our state of WA, the Broker, who owns all RE business in that office, has a legal duty to immediately get that money into his escrow account, or into the escrow co's account, but even now I occasionally see some escrow that has NOT been propertly accounted for and is still floating around in somebody's file folder or in some other WRONG place.
So make your agent commit to you, in writing, exactly what he's going to do with your $$$ pending that offer...and what's going to happen to it if the offer is A. Accepted, or B. Rejected.
For the reason mentioned here, a lot of us prefer to give an earnest money NOTE, payable at closing; or to hand our money into escrow directly, at the escrow co. we name, if the seller hasn't designated some independent escrow co....with very clear written instructions from US as to what the escrow co. is going to do with our money if the offer is/is not accepted.
I personally have had to warn or threaten various negligent agents & their brokers in the past, so I'm now very cautious about where I put my EM, and the accompanying instructions to escrow co..
I'll bet I could go through my RE files and dig up a dozen old situations where some escrow co. is STILL holding the EM YEARS after a failed close...because the parties were not totally clear as to what, how, who on where it was going, who got it, when.