Earnest Money

When a realtor advertised “experience” I used to discount the claim. Not any longer. Recent market events require the guidance of a knowledgeable agent. One area is the recommended amount of earnest money offered by a buyer. Last year I would recommend a substantial amount of earnest money. The market was competitive. Often times there were multiple buyers for almost every home. The higher the earnest money the more confidence the seller had in the buyer. There was also an underlying motive. If I suspected sellers would get multiple offers, the earnest money was a guarantee they would continue with the contract. For example, I had one buyer who had an accepted offer on a $300,000 home. It was a great deal verified by the appraisal which came in at $335,000. The seller had another offer for more money. Had we only agreed to $1,000 earnest money (liquidated damages for a broken contract) the seller could have paid the $1,000 to the buyer and accepted the $10,000 higher offer for a $9,000 profit. But we agreed to $15,000 earnest money so breaking the contract wasn’t attractive to the seller.

But as you have no doubt heard, the market has changed. There are substantially more homes on the market and sales have substantially decreased. Additionally, lenders have fewer funds to lend. They have severely tightened lending requirements rejecting even some qualified buyers. But more alarmingly, some have failed to fund after documents have been signed at the title company. While that might seem like an inconvenience it can risk the earnest money. There is no provision in the Real Estate Purchase Contract for a bank failing to fund at closing. This isn’t just hypothetical. It actually happened three times in our office alone. Conversations with title agents have confirmed our experience wasn’t unique.

Now if you had $1,000 earnest money the seller might be willing to work with you, but now that $15,000 earnest money encourages the seller to take the earnest money because the buyer failed to fund. The seller can lower the price of the home slightly to encourage new buyers and pocket the difference. The loss of the money can be challenged but that involves a fight no one wants to have.

The moral of the story is to hire a buyer’s agent that has seen both sides. They can help avoid the problem all together. Part-time agents, new agents and those with few transactions most likely won’t see the train wreck coming. Make sure you have an experience requirement when selecting a realtor!

Gary B. Howard