When a young Yourtown home buyer first hears the term “earnest money deposit,” the words alone pretty much explain the general concept. But I make sure to clarify the details before we begin to assemble our offer.
The purpose of the earnest money deposit is to reassure the seller that this is a buyer who is serious about completing the sale. If the seller does accept the offer, the earnest money is held in trust until it can be applied to complete the ultimate sale.
Since this deposit is a considerable sum, I make sure my buyer client fully understands the terms that control how it’s handled—including three major happenstances by which earnest money might be forfeited. Each is avoidable if proper care is taken:
- If sufficient mortgage financing cannot be obtained or if the Yourtown property fails inspection, the offer’s contingencies should specify that the earnest money will be returned. That is one reason why submitting an offer that waives those contingencies is best avoided. There are a few exceptions—for instance, it might be reasonable to waive a mortgage-financing contingency when competing with an all-cash buyer (but only if a lender has already granted conditional approval). Another exception can occur if the home is going to be torn down, in which case it would be reasonable to waive the inspection contingency. Otherwise, I urge my buyers to stand by the usual contingencies.
- The purchase contract contains deadline dates at which phases of the deal are to be completed. In most instances, sellers will agree to some extensions if the buyer is making good-faith efforts to meet the deadlines. But especially for the final closing date—and most especially if the paperwork includes a binding “time is of the essence” clause—failure to meet the dates risks a failed deal and loss of the earnest money.
- Should adequate financing be offered and the Yourtown property passes inspection with flying colors, if the buyer has a change of heart for personal reasons after the contingencies have been lifted, the earnest money is probably lost.
It might seem hard-hearted for the seller to refuse to return that deposit, but that’s not really unreasonable. In addition to the hassle of canceling the moving day services and re-entering the property in the Yourtown listings, questions can be raised in prospective buyers’ minds about why the first contract failed—a potential problem the seller did nothing to deserve.
Before a bid is ever submitted, I do my best to see that my buyers are sure—thoughtfully so—that a property is the one they really want. From that point on, I keep on top of all the ensuing steps, from drawing up the offer all the way through the final closing. I hope you’ll call me whenever you’re ready to discuss your own Yourtown real estate plans!
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