March 20, 2011
How to Protect Your Earnest Money Deposit From Being Trapped by Seller
Hi I’m Jay Seville, the owner of JustNewListings.com Realty and I wanted to cover with you a really interesting and dramatic subject today and that is earnest money deposits. The acronym for that would EMD for short and it brings a number of issues to the table and especially from a buyer-agent’s perspective. How to protect your client? How to protect their money from being trapped and in limbo if there’s a disagreement between the purchaser and the seller etc. What can you do? And if you’re the buyer, how can you educate your own agent on these matters since probably one in a thousand are doing anything to protect you and your earnest money Deposit which is a sad state of affairs. I’ll just leave it at that.
Let’s say you’re going to buy a house for 500,000 dollars. You’re going to put immediately when you come to terms and have a contract. You’re going to put a little bit of money down. It’s part of your downpayment put into escrow in advance. This gives you skin in the game. This tells the seller that you have full intention of going through with the contract because if you default, then your earnest money deposit is at risk.
The best selling agents (typically referred to now as buyer agents) will try to keep their clients’ earnest money deposit as low as possible to minimize their risks. If there are no competing offers on the table or expected then one might as well try to keep their deposit as small as possible. Life can be crazy and you can expect the unexpected….So what if you want to void the contract within one of the contingency windows such as the home inspection? You are within your contractual rights to void without default yet can you get your earnest money just handed back to you the following day? Is it that simple?
It would be great if refunding earnest money deposits was so simple as sending the money back to its rightful owner who even was within the boundaries of the contract in voiding the sales contract. But the real world and the paper world (contracts) are often strikingly different in how things play out. As a general rule brokers cannot just refund the earnest money deposit back to the buyer.
The broker cannot release the earnest money back to the buyer until he gets written consent from all parties. A release form must be signed off that states specifically how much of the deposit is being released to each party. Usually it all gets returned to the buyer if they are rightfully exercising their contractual rights to void the contract within a contingency window. But once in awhile, even though it’s obvious the buyer should receive their earnest money the seller will refuse to sign/initial the release and at that point the EMD is held hostage essentially to the angst of the buyer.
If everybody will not sign the release form, the buyer’s broker must sent notice to the seller in writing that he intends to send the earnest money deposit back to the buyer. This gives the seller 30 days within which to protest the release in writing back to the broker otherwise the broker is free to finally release the money to his client. If the broker does receive the written dispute from the seller, then the local courts will decide who gets the money and the process is slowed down considerably. This scenario is very rare.
This scenario where the seller refuses to sign the release of the funds means your earnest money is held hostage practically whether it be for just that 30 days or much longer should the seller dispute in writing the release after being notified by the broker. There is a lot of room for drama. Not having your earnest money available would make it hard to move forward with the search for a new home.
What is the solution? How can the buyer’s agent and his client protect themselves from the scenario of an embittered seller refusing to sign a release of the earnest money deposit should something in the home inspection cause the buyer to exercise his right to void the contract? They way around this is an addendum stating that no earnest money will be deposited all parties have signed the negotiated home inspection addendum. It is at this point the money will be deposited as there is now no window for the buyer to void the contract based on a home inspection issue. This really limits the potential drama related to the deposit and a messy home inspection which can lead to the seller being angry at the buyer.
For cutting edge consumer advice and tips for purchasing Great Falls real estate visit the website of JustNewListings.com Realty Inc. There you can find homes for sale in Great Falls Virginia and surrounding areas in DC metro as well.
Filed under Finance by
