Wasn’t really a typo, but was somewhere south of perfectly articulate. Generally earnest money is held in escrow until closing, at which time it’s indirectly given to the seller by being added to the “pot of money” that’s available for settlement. — Bryan Ellis

Escrowed EMD’s and option fees are incredibly simple to understand but I see daily misconceptions and misunderstandings… even by fellow investors and Realtors. (A BIC in a Coldwell Banker office near Charlotte, NC was just shot in his office over a 1000.00 EMD misunderstanding a week ago…still in a coma…tragic)
Its worth noting the difference between the meaning of “Default” and and “contingency” . Depending on what instrument (contract + addendums) is being used, the knowledge experience and skill of the person writing the offer, and what contingencies are contained therein, a Buyer can easily protect themselves and their EMD no matter what the dollar amount without risking default and forefeiture of their EMD. Properly structuring a transaction weighted in your own favor to protect your own best interests is most definitely a “knowledge is power” situation.

Re: a $5.00 or $10.00 earnest money amount not standing up in court, this is clearly an opinion. What is your data? Are you familiar with a contract on a home that used a small earnest money deposit, placed with either an option agreement or purchase agreement, that went to court? And the seller won? If so, how much was the judgtment? And did the seller ever collect? Absent fraud or mis-representation by the buyer, I don’t think a judge would find in favor of the plaintiff.

Additionally, earnest money on residential real estate usually ranges $500 - %2,000. on average-priced home sales anyway. Almost nobody will take someone to court for that amount of money. Conciliation court would likely be the court that would be used, because hiring an attorney would cost more than the possible judgment the seller would achieve. Plus, collecting on a judgment from someone who doesn’t want to pay can take months. Plus, someone who has just lost a sale of their home would likely concentrate their efforts on getting the home sold, not suing someone. Sure, there are exceptions. Some stupid sellers who are just plain angry and spiteful might sue for spite, but the odds are with the buyer that this won’t happen.

Now that i’ve invested ten minutes in completely refuting this post, :-), I gotta ask — why did you invest time in writing this post with so few buyers ever being faced with court litigation for an “inadequate earnest money deposit” of $500 - 2,000.? You’ve done better in the past. Odds are, your next post will return to their usually insightful character…

Thanks, I think. Note that I never stated that there is case law for my opinion that a $5 earnest money deposit will probably be rejected by a judge. This issue would be different for each state, and possibly even in separate jurisdictions within a state. Nor is it my opinion that it would be reasonable for a judge to make such a ruling. But I absolutely stand by my basic premise: A judge has the option to determine that such a one-sided clause is unenforceable, potentially making the buyer liable for greater damages. Will it happen every time? Certainly not. Is it distinctly possible? Without a doubt. — Bryan Ellis

Can you put a clause in your contract that the earnest money will be escrowed in a title company AFTER the property is inspected? Meaning, if the inspection fails the earnest money will not be escrowed and the deal is off. Just an idea, what do you think?

Thanks
Sam

Sam - by all means, that’s a totally reasonable thing to do! — Bryan Ellis | Free Real Estate Training

Another situation arises when the buyer intends to make repairs to the property before closing (yes it happens all the time in buy/sell contracts and option contracts). The buyer may require the seller to deposit earnest money (or a promissory note) in the amount of the repairs. In case the seller cannot deliver clear marketable title at closing, the deposit is delivered to the buyer as compensation for the repairs. Repairs made before closing are usually in anticipation of flipping the contract to a retail buyer.

For a contract to be binding, there must be an “equitable exchange of consideration” or the *promise* of an equitable exchange of consideration.

For example, the *promise* to deliver a certain sum of money on a particular date and the *promise* to deliver clear marketable title on that same date creates a binding contract. There is an *equitable* exchange of consideration. The consideration to be delivered by the buyer is equitable to the consideration to be delivered by the seller.

The earnest money deposit is not consideration, because both parties have a claim on that money until the conclusion of the contract. Also, the size of the deposit makes no difference in whether the contract is binding. The earnest money deposit is an invention of the real estate brokerage industry to reduce frivolous offers and to compensate the seller for taking the property off the market in the event the contract fails.

As Bryan indicated, unless you are in a very hot market with multiple offers competing for the same property, there is no need for a large cash deposit. In fact, you can use a promissory note (at zero percent interest) as your earnest money deposit, to be redeemed for good funds upon satisfaction or removal of all contingencies. There is no need to have your cash at risk in a 3rd party trust account until you are certain that you will close the contract. Also be sure that any accrued interest on your deposit is applied to your purchase price at closing or refunded to your upon voiding the contract (exercising your escape contingency).

Some brokers will try to insist on a minimum deposit. Ignore their protestations and use a deposit that you believe will demonstrate your good faith and earnest to close on the contract, and that it will adequately compensate the seller for taking the property off the market in the event that you default. Be sure your contract specifies that deposit is “full liquidated damages” and you are not liable for specific performance.

A valid point - but don’t forget that a “full liquidated damages” clause (while being a good idea) will not be sufficient as meeting a reasonable standard if the earnest money deposit is very small and the contract goes before a judge for litigation. — Bryan Ellis

Also remember that an offer can be withdrawn at any time without penalty or forfeiture before acceptance by the other party. Many brokers do not understand this basic fact of contract law. If you submit multiple offers on multiple properties and one is accepted, you can immediately withdraw the other offers and immediately receive your earnest money deposit on those withdrawn offers. (You should be using a promissory note on all your offers anyway.)