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Earnest Money – What is It? Does the Buyer or Seller get to Keep It? When Does the Seller Get the Earnest Money? A Case Study

Homes for Sale

What is earnest money?

Earnest money is the money a buyer puts up at the beginning of the contract. Usually about 3 to 5 days MEC (Mutual Execution of Contract the point when all parties sign the original offer). The earnest money is usually (at least in the Denver and Denver Foothills) in the neighborhood of $5,000 to as much as $25,000 depending on the price of the home. Sometimes even more. This amount has gone up in recent years due to it being a seller’s market as well as our low inventory. The sellers are not wanting to remove their home from the market unless a buyer has full intentions of fully fulfilling their contractual obligation.

For this case study the situation is:

Purchase Price: $300k-400k
Amount of Earnest Money: $3,000
Blog Poster Represents: Seller
Market Condition: Slight Lean Towards Seller

The offer was extremely good for the seller. It was a cash deal. The buyer waived all loan conditions such as appraisal and loan termination date. These terms are what made the offer so attractive to the seller and they accepted with no counter offer. There were no other “outs” or conditions to financing. 10 days into the contract buyer sends over a notice to terminate with the reason being buyer financing.
Buyer believes that due to a financial situation they are able to terminate the contract and receive their earnest money back. The seller begs to differ with the buyer.
Let’s discuss this further. There is a reason real estate transactions have earnest money other than giving the buyer equitable interest in the property. It is true that the contract to buy/sell real estate in Colorado and other states is really written in the buyer’s favor. As long as the dates and deadlines and the reasons to terminate are followed to the letter of the contract the earnest money is almost always returned to the buyer. The way the contract works is let’s say the buyer found something in their inspections and they want to terminate the buyer submits a notice to terminate prior to the inspection termination deadline and the earnest money is returned with no fuss.
When things get tricky is when the buyer either blows through a contract date or they have waived the right to terminate under a specific condition. Buyers and buyer agents often write these great incentives into the contract to make their offer more competitive and  appealing when there are multiple offers or if they are offering less than asking price. At this point the seller weighs their options but at the same time they know if the buyer gets cold feet or misses a deadline they can at least keep the earnest money.
The odd part of Colorado real estate law is even if the buyer is negligent or absolutely 100% wrong they can still contest the earnest money and dispute it. It is one thing about CO real estate law I totally disagree with. especially since Colorado courts are hesitant to award legal fees in these kinds of situations. So the seller needs to fight for their money.

Who determines how much money to hold in earnest money?

Earnest money amounts are set by the seller and listing agent. The market also bears the responsibility of  setting the amount. If the market won’t put up with rising amounts then the amount must come down. The amount of earnest money is not usually a huge deal. The earnest money is considered as part of your down payment or cash due at closing. The Colorado contracts are also set up in the buyer’s favor and as long as you meet all dates and deadlines you will receive your earnest money back as long as you cancel the contract for a good reason under the deadline that coincides with your reason.

Who physically holds the earnest money?

Earnest money is held by one of three parties but is always held in the same type of account. It is either held by the listing broker’s firm, the title company or an attorney. The money is always held in a trust account. This trust account can either be intrest bearing or not. It doesn’t really matter because neither the buyer or seller is given the interest. Whoever is in charge of the earnest money is not able to release to either party until the contract is executed at the closing table or both parties sign an earnest release form.

What happens in an earnest money dispute?

The third option for the earnest to be released is after a dispute. Both buyer and seller must go to mediation to see which one can prove they are in the legal right to have the earnest money.

For a specific question about earnest money or to see what other people have asked about earnest money please visit our real estate forum

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