Small Town Vs. Big City Real Estate Dealings
How Much Earnest Money Should You Expect to Put Down or Receive?
For transactions of existing residential homes, in moderate markets, and / or where the other agent is known, or due diligence timelines are shorter, Earnest Money often isn’t that critical to make a deal work.
Talk with your Southern Athena Agent for insights on how much Earnest Money is appropriate for your specific situation. For Sellers, Earnest money contract stipulations should definitely be considered when comparing offer strengths and weaknesses, but should not necessarily make or break a deal.
Who Should Hold Your Earnest Money?
We suggest Earnest Money always be held with YOUR closing attorney.
Before opening Southern Athena, I had many advisors suggest Earnest Money always be held by the transaction’s Closing Attorney or Title Attorney. For that reason, I elected to waive our Southern Athena Earnest Money Escrow Holding Account with the Tennessee Real Estate Commission for liability reasons. (Imagine getting sued because you interpreted a contract one way and an attorney says it should be another way…)
Though we still have an Escrow account for when we grow into other Real Estate related endeavors that require holding money on behalf of clients, it currently cannot be used without 1st giving notice to TREC. Therefore Southern Athena does NOT accept Earnest Money at this time.
What to Do if A Real Estate Contract Falls Through and Who Receives the Earnest Money
As Realtors, we are not allowed to provide legal advice or legal interpretation of contract language, and cannot technically advise a client on their legal rights to funds or disbursement of funds. We use Association of Realtor Forms for all Residential transactions, prepared and updated yearly by the Tennessee Association of Realtors legal team, and have a couple of common scenarios that relate to a contract. If an Contract falls through, Earnest Money is usually disbursed in one of the following ways:
- Forfeited by Buyer and Paid to Seller per the Purchase and Sale Agreement
- Returned to Buyer for the following Reasons:
- Financing Contingency – ie. Buyer could not obtain financing or Appraisal did not meet or exceed lender requirements.
- Inspection Contingency – ie. Buyer found deal breakers in the inspection, or Buyer and Seller could not come to a formal resolution on matters involving the condition of the property and acceptable terms relating to repairs or price.
- Seller is unable to provide free and clear Title
- Other contingencies were not met. – Ie. Sale of another property for a 1091 Exchange
- Split Between the Buyer and Seller – See below scenarios
Above is a snapshot of TAR’s Earnest Money / Trust Money Disbursement and Mutual Release of Purchase and Sale Agreement form used when a Residential deal falls through.
We know 1st hand, that though these seem like simple scenarios, there can be a lot gray area in a contract and what is right vs what the contract states. For instance, should a Buyer receive Earnest money back if he/she went and purchased a car before closing and now cannot get financing? Seems like a stupid mistake that should result in Buyer’s loss of Earnest Money, but this isn’t always the case. Now, what if the Buyer lost their job right before closing and cannot get financing? Should the Earnest money still be due to the Seller when the Buyer is hard on their luck?
Sometimes a contract falls through for reasons out of a party’s control. What if a Seller has recently passed and the kids are fighting over rights to the property, or creditors have liens on the property? Should the Buyer be entitled to damages for wasting time on a contract that does not have a free and clear title? Working through disbursement of funds can get pretty complicated.
We have even experienced where a Buyer’s title attorney was holding the funds and would not disburse them to the Seller without their client’s signature. Even though the Buyer was in default on the contract AND it clearly stated Earnest Money was non-refundable after a specific date, he still refused to let the Earnest Money go, and would not sign any paperwork to release the money. Legal discussions and heated conversations en-sued <—literally!
The best thing you can do when a Real Estate contract falls through is to stay calm and work amicably towards a resolution.
Talk with your Realtor and your attorney about your rights. We take extra care to keep detailed paperwork and all written correspondence on our transactions. We are able to quickly provide these to our client’s legal team to help expedite and resolve Real Estate contract issues. This documentation will be invaluable in helping your attorney best advise you of your rights per your contract and get you moving onto greener pastures with success.
Our Agents Are Trained in Earnest Money Do’s and Don’ts
Our Southern Athena Policy Handbook includes some of the following Agent Guidelines for Earnest Money Best Practices:
If you are working with a Residential Buyer:
- If the transaction is less than $500,000 suggest Lender Letter in leu of Earnest Money. If Earnest money is required by other agent, or there is high competition for the property, use Earnest Money for leveraging your offer strategically. Ie. Higher with higher competition, appease listing agent, a-typical situations like early occupancy, etc.
- Buyer’s closing attorney should be with one of our Preferred Vendors
- If Title is being paid by Seller, and Buyer is closing with Seller’s Title Attorney (To save everyone money) then Earnest Money should be held by that attorney.
- Have client send a copy of check to you prior to sending, and follow up that it is deposited appropriately by contract deadlines. Send a copy of Earnest money receipt to all parties.If you are working with a Residential Seller:
- Seller’s closing attorney should be one of our Preferred Vendors or previous attorney used to close the Seller’s Purchase of the property (as applicable). Providing existing title from purchase can save up to 30% off of closing title expenses.
- If Seller is paying for Title, Buyer should be closing with Seller’s Title company to receive cost of title discounts.
- Buyer’s Earnest money should be deposited with Seller’s Title company.
- Consider % of Earnest money as it relates to Financial contingencies. Higher % amounts should be considered for tighter lender restrictions, or lack of proof of financial performance such as a lender letter or bank statement showing cash funds.
- Contract timing should state a reasonable time to for funds to be deposited: 3-5 Business days max after binding agreement date, or prior to inspection due diligence deadline.
- Confirm and provide receipt of Earnest Money to all parties once received. If it is not received by contract deadlines, provide notice with TAR Notice Form.Commercial / Land / Other Transactions:
- Earnest Money should be held with YOUR client’s closing attorney or CRE attorney. Non-negotiable.
- Consider staggered deadlines where Earnest Money will become non-refundable. Due diligence deadlines, damages to Seller, etc.
- Earnest Money should be larger % of transaction if Buyer does not submit lender contact and letter.
- Use good judgement on the word “Earnest”. If the Buyer seems sketchy, consider increasing the required amount. If the Seller has a lot of complicated legal language included in the contract, consider decreasing your Buyer’s liability.
- Call me and let’s discuss appropriate amounts, timelines, and dealings with ALL Commercial / Land / or Other Sales on contracts involving deposits!Note for Transactions: All Earnest Money must be deposited within 24 hours of receipt. Please coordinate confirmation and proof of receipt to align with your transaction deadlines and include a digital copy in your Southern Athena Transaction file folder.