How earnest are you?

[irvinehusky]

What is the purpose of the earnest money if it has no legal weight behind it?  I know it's supposed to be a show of faith but if my understanding is correct, you're not automatically entitled to it even if the deal goes sour.

Some years back when I sold my home, I unfortunately dealt with a buyer, new to the U.S., and with a shady buyer's agent (His card said something like gasoline stand real estate agent).  Not a good combo.  :
This agent busted open our locked screen door and came in past 8PM when we were taking a bath.  They still wanted to see our house but I told them to take a hike and didn't expect them to return...the next day...around 8PM again...without calling...and trying to bust open my locked screen door again.

It was right when real estate started to drop so you couldn't be too picky.  I "fortunately" quickly got into a multiple bid situation and the buyer (or in retrospect, this shady agent probably decided on his own) that they would drop many of the contingencies including the inspection.  Unfortunately, my preferred buyer dropped out early so although I had bad feelings about it, didn't have much of a choice but to accept this buyer since they bid up the price quite nicely as well.

Probably somewhere in the following weeks, this buyer talked to her friend or relative and decided it was a big mistake to drop the inspection contingency and started demanding to allow an inspection.  After weeks of this, we finally said that they could do an inspection but that we wouldn't fix anything (because that was the deal) and you're still buying the place regardless.

After the inspection, the buyer flips out and decides to back out.  So, I asked for the earnest money and found out I would have to sue to get "some" of it (I was told that the judges would be sympathetic to the buyer and not award all of it).  And that it would cost me $1500 in court fees just to sue.

My agent recommended me to just drop this buyer and move on but I felt the market dropping quickly and I wasn't about to go without a little going away present from the buyer.

I've never sued in my life and probably wouldn't have in this case but I threatened it.  At the end, the buyer's agent's broker fortunately was ashamed of the job done by his agent and talked some sense into them.  Also, the other broker made the buyer's agent pay me out of his pocket as well.  We ended up splitting the earnest money.

I would like to see the earnest money automatically distributed by escrow if the buyer doesn't complete the transaction as promised.

Is it any different in California?

 

[socal78]

Yeah, I had a similar experience when selling my last house (here in California). Buyer backed out after opening escrow and got off scot-free. Since it was the same day escrow was opened, I was ok with letting him off the hook on the advice of that agent that we would have a hard time holding him accountable for the earnest money anyway. At least he didn't waste much of our time but yeah, him playing games with us did cost us other opportunities. I wish earnest money was taken more seriously.

I was even more confused when we more recently became buyers again (California as well). The offers were made entirely digitally (our first time doing it that way) and I don't remember writing a check for the earnest money although we still somehow did do the earnest money --??? To this day I don't understand. IR2 was our agent and I remember asking him how this works. He did explain it to me but I never understood the answer at all. Somehow it works, I just don't get how. I'd love to know more about how that works.

 

[irvinehomeowner]

@SoCal:

Maybe you wired your earnest money in? I think usually it's a check or money order.

When we bought a resale home several years ago, we had to put 3% down to open escrow. Back in '07 (or '08) when we were looking at new builds, you had to give them a check to "reserve" your lot. We actually did that but when their lender couldn't qualify us, we had second thoughts about affordability and instead of pursuing another lender, we asked for our check back and they really couldn't balk because it was their lender that couldn't approve us.

From what I understand, the earnest money is there to keep the buyer from pulling out for not-so-legitimate reasons like "I don't like the carpet color" because things like that should have been vetted out prior to making the offer or opening escrow.

Usually that only comes into play when you are past contingency removals and there is really no reason for the buyer to back out unless it's some catastrophic event like job loss or their lender ends up not funding. In that case, it's reasonable for the seller to ask the buyer for a portion or all of the earnest money to cover any "damages" such as money put in to do inspection repairs, termite remediation etc etc.

And yes, it can get tricky with proving "damages", but I think in most cases, the buyer will give up some of their deposit because of reasonable expectations (which is what it sounds like in irvinehusky's case). As for yours, they did pull out before any real work was done (appraisals, inspections, remediation) but I do understand the frustration and how accepting one offer may have made you miss out on others. But, in most cases, if contingencies are not waived, buyers have until that time (usually 15-21 days) and this is usually based on inspections, termite investigations and appraisals.

For example, if the inspector finds major structural damage in a home you are buying, wouldn't you want to be able to withdraw from the deal without losing your earnest money? Or what if the appraisal comes in much lower than the offer price and the bank will only approve your loan if you put in $xx,xxx more? I think you would want to be able get out of that without losing your entire 3%.

Their are a myriad of reasons why a buyer would pull out after contingency removals, but those need to be investigated case by case rather than an automatic payout to the seller for the whole amount. I understand irvinehusky's desire for a "pulling out of the deal" present, but I think he(?) would agree that the entire amount might be a little unfair if he really hadn't put much money into remediation or repairs (which sounds like he didn't). The split sounded reasonable.

 

[socal78]

@SoCal:

Maybe you wired your earnest money in? I think usually it's a check or money order.

But there was nothing to wire it to. For ex: Escrow was not opened on the first home we offered on.

 

[irvinehomeowner]

@SoCal:

Maybe you wired your earnest money in? I think usually it's a check or money order.

But there was nothing to wire it to. For ex: Escrow was not opened on the first home we offered on.

Escrow isn't opened during offers... only once an offer is accepted by both parties and the proper information required is supplied for escrow to open.

 

[socal78]

@SoCal:

Maybe you wired your earnest money in? I think usually it's a check or money order.

But there was nothing to wire it to. For ex: Escrow was not opened on the first home we offered on.

Escrow isn't opened during offers... only once an offer is accepted by both parties.

Exactly!

 

[sgip]

I think the takeaway I got from your story that it's better to not chase the highest possible price, but the most reliable buyer to close.

It's too bad there isn't time allotted to meet personally with buyers to get a sense of who's really in the deal and who is just slinging offers to see what's going to stick.

 

[irvinerealtor]

I will never understand how the appeal of the "Hey Vern!" guy went mainstream enough to warrant several commercial spots, a TV show, and multiple full-length feature films, but facts is facts: that Earnest guy went viral before "going viral" went viral.

Regarding the questions posed by irvinehusky:

1. Buyers often make multiple offers. Sometimes they have offers accepted on multiple properties simultaneously, but are only intending to actually close on one of them. The act of moving their earnest money out of their possession and into the temporary possession of escrow is a commitment of those funds and helps prevent them from unnecessarily tying up multiple properties. Even FCBs run out of real money eventually.

2. The agreement between buyer and seller should stipulate clearly how long a contingency period you are expecting. This contingency period is intended to protect the buyer and give them enough time to investigate the property (and solidify their loan eligibility, if financing the purchase). Sometimes this is waived by buyers that feel they are aware enough of what they need to know about the property to move forward. Sometimes it is a short period of 7 days, just for them to schedule a home inspection and review the title records. Usually here in Orange County it is 17 days, to allow for a home inspection, a termite inspection, an appraisal (or multiple appraisals), HOA docs to be provided, and all of the rest of the seller disclosures to be reviewed. The contingency period can be even longer for more complicated transactions. Both buyer and seller agree on how long this period should be.

3. Before contingencies are lifted: hopefully the buyers are doing their due diligence and finding out enough about the property as they can. Obviously, if news comes up that changes their mind about the property (i.e. pending litigation, structural issues, zoning issues, noisy neighbor dogs, better competing property comes available, etc.) I think we'd all agree it is fair for them to be able to take their money back with them. That's what the period is for.

4. At the end of the contingency period: buyers either agree that they are satisfied with what they're buying for the price and lift their contingencies, or they cancel the agreement because it's no longer a "good deal" for them, or they ask for more time to perform additional review. With a few technical documents (NBP/ETA/CR), the sellers can then choose to agree to extend the period or decline and have the option to cancel themselves. This protects the sellers from being "held hostage" by buyers that refuse to lift contingencies and frees them to move on to other options. If there are no better options, sometimes the sellers decide not to exercise their right to cancel the deal, and continue to press on with these same buyers.

5. After all contingencies have been lifted: the buyers have agreed that the risk is worth the reward and they have actively signed away all of their contingency rights. However, LIFE HAPPENS and situations change and buyers can still have valid reasons to wish to back out.
As a seller, you'd want protection from a buyer arbitrarily backing out at this point, as was mentioned above.
As a buyer, you'd want protection if something happened such as a job relocation, health event, or other major life event changed and you were no longer interested/able to buy this home. You wouldn't want to have to be forced to buy the home.
So what to do to serve both parties' interests? What's the best solution?

6. Also in the contract, it's spelled out that cancelling as the buyer at this time would put your earnest money at risk (equal to what you put in as earnest money up to 3% of the purchase price, if both parties have endorsed that paragraph in the contract.) It's not "automatic" though... The seller would have to be able to justify that they've been "financially damaged" by the cancellation. When property prices were dropping like a zeppelin made of lead, that was not so difficult to do. When properties were skyrocketing, this was much harder to accomplish, since essentially the seller could now sell the home for MORE based on market conditions. Buyer and seller would have to agree on what the fair amount would be. If they are unable to come to a consensus, they'd move to mediation and/or then binding arbitration (also, only if they'd both agreed to that provision in the contract.)

Yes, it's a major PITA when a transaction doesn't make it all the way to fruition. For both parties, but for different reasons. Here's hoping that you don't have to deal with a failed escrow again in your future. Unfortunately, it's a statistical certainty that I'll see more in mine.

-IrvineRealtor

 

[irvinehomeowner]

@SoCal:

Maybe you wired your earnest money in? I think usually it's a check or money order.

But there was nothing to wire it to. For ex: Escrow was not opened on the first home we offered on.

Escrow isn't opened during offers... only once an offer is accepted by both parties.

Exactly!

What "exactly"? I don't know how it worked for, but shortly (a few days) after escrow opens the buyer usually has to put earnest money into escrow.

What you are telling me is that you don't know if that happened? You may want to ask your husband if you're not the one who handles the finances. Or maybe your deal didn't require earnest money (which is uncommon)?

 

[socal78]

What "exactly"?

"Exactly"... as in, "Exactly, Iho. You get it! You follow what I'm saying."

I don't know how it worked for, but shortly (a few days) after escrow opens the buyer usually has to put earnest money into escrow.

What you are telling me is that you don't know if that happened?

When me and the rest of the world were buying and selling way back in the "olden days" (lol) a physical check would be presented along with the paper offer. I believe either the listing agent or their broker held onto it until escrow opened. We were doing it that way up until five years ago. Like I said, I guess now it's different since they are presented in a new fashion. As a buyer, I fully expected & was okay with presenting a check for earnest money. It wasn't until the time came that I learned it was done differently nowadays (or depending on the agent??) How the earnest money is presented with a digital offer, I remember not understanding then, asking, and it still not making any sense to me especially compared to how it was traditionally done.

You may want to ask your husband if you're not the one who handles the finances.

??? Iho.  ???

Or maybe your deal didn't require earnest money (which is uncommon)?

 

[irvinehomeowner]

Ahh. I think I understand what you are saying.

Actually when we bought in the early 2000s (does that count as olden days?), we didn't have to put in earnest money until escrow opened. I don't ever recall having to give a check when presenting an offer, only when the offer was accepted. From the offers we have given dating back to a few years ago, we usually give a snapshot of our bank account balance to prove we have the money for a down payment.

So when you last bought your home, which was fairly recently, your digital offers were digital in that you could sign them without having to be physically there. I believe PDF versions of those documents were sent to the seller to approve and if their agent also used E-sign, they would respond in kind.

But I don't think you had to put a "check" into escrow until your offer was accepted and escrow was opened. Maybe there are still some agents who want to hold your check until escrow is opened but I don't think that is a requirement these days.

 

[socal78]

Hey, totally off topic, but why does your horse have the "Skittle Squirts" in that picture??? (I was going to say Hershey Squirts but it's rainbow, so...)

 

[bones]

.

 

[irvinehomeowner]

Hey, totally off topic, but why does your horse have the "Skittle Squirts" in that picture??? (I was going to say Hershey Squirts but it's rainbow, so...)

Because that's what unicorns do.

As I've said before, brings a whole new meaning to "Taste the rainbow!".

 

[irvinerealtor]

Proof of funds (and putting money into escrow)

In the real "olden days" (when I was growing up and just watching the deals happen at my grandmother's brokerage in San Diego) the contract was just one page. The top half of the page stated that the buyer was buying, and the seller was selling, and a warning to the buyer to make sure he knew what he was buying. If financed, the bottom half of the page would stipulate the terms of the loan, and that was it.
Parting words were something along the lines of, "Best wishes, hope it works out. And good luck! "

The most recent residential purchase contract is now 15 pages and is continually being changed, updated, and tweaked, requiring continuing education for those of us in the business. Some of the recent changes have covered this change in EMD dynamics.

Ideally, when an offer is tendered, the buyer's agent provides "proof of funds" that the buyer is qualified to make the purchase to the listing agent. This can include a copy of their preapproval letter for their loan, and a bank/savings statement that shows their liquid assets.
- SOME of the listing agents require a copy of a personal check in the amount of the EMD to be included in the offer package. Notoriously, REOs and SS lenders require this for the listing agent to upload into the lender's system to make the offer "complete" and get it to be reviewed by their asset manager. I believe it's archaic because just because it's a picture of a check, doesn't prove that there are good funds behind it, but without it the offer won't even make it to be reviewed, so you prepare early and have a copy ready.

When an offer is accepted the buyers personal check "could" be submitted to escrow, but it's strongly suggested to either wire the funds to escrow or deliver a cashier's check to them, within the 1st three business days after the offer's been accepted.
- If a wire or cashier's check are used, the funds are considered "good funds" immediately and they are accessible to the escrow team.
- If a personal check is used, escrow must hold it for up to 5 days to make sure that the funds are "good funds" and that the underlying bank will deliver the funds as promised by the check. This may take even longer if the check is from out of town or out of the country. This can cause timing issues down the road for your transaction. Remember that the EMD funds also help subsidize some of the other documents that are produced (city inspection, HOA doc preparation, etc.) If the funds aren't good yet, it can hold up the rest of the time frames, like the aforementioned contingency periods.

If you're the buyer, how comfortable would you be to sign off on the disclosures on the 17th day, if the HOA documents haven't been provided to you? (Smile, because "surprise" potential litigation, special assessments, and/or militant parking policies are all land mines that might be lurking in those docs.)

IIRC, after the agreement was reached for SoCal's purchase, I met Mr.SoCal at their bank to receive a cashier's check and delivered it to escrow for them.

Hopefully this clarifies a bit,
-IrvineRealtor

 

[irvinehusky]

Hopefully your situation didn't eat up too much of your time.  Mine probably took about three months to resolve and all during that time, as the market was dropping like a rock, my property was off the market.

I finally sold the place about a year later, over $100K less than the original agreement, mucho stress over that time and also very close to a divorce because of it. 

Yeah, I had a similar experience when selling my last house (here in California). Buyer backed out after opening escrow and got off scot-free. Since it was the same day escrow was opened, I was ok with letting him off the hook on the advice of that agent that we would have a hard time holding him accountable for the earnest money anyway. At least he didn't waste much of our time but yeah, him playing games with us did cost us other opportunities. I wish earnest money was taken more seriously.

I was even more confused when we more recently became buyers again (California as well). The offers were made entirely digitally (our first time doing it that way) and I don't remember writing a check for the earnest money although we still somehow did do the earnest money --??? To this day I don't understand. IR2 was our agent and I remember asking him how this works. He did explain it to me but I never understood the answer at all. Somehow it works, I just don't get how. I'd love to know more about how that works.

 

[irvinehusky]

I agree with your statements.  I'm not being unreasonable and expect the earnest money if they cancel during their contingency periods.  But all contingencies were released in my case.

I'm interested about your paragraph 6.  in real life, would a buyer agree to that?  Or, would you as the agent allow your buyer to sign that off?  Just curious.

I will never understand how the appeal of the "Hey Vern!" guy went mainstream enough to warrant several commercial spots, a TV show, and multiple full-length feature films, but facts is facts: that Earnest guy went viral before "going viral" went viral.

Regarding the questions posed by irvinehusky:

1. Buyers often make multiple offers. Sometimes they have offers accepted on multiple properties simultaneously, but are only intending to actually close on one of them. The act of moving their earnest money out of their possession and into the temporary possession of escrow is a commitment of those funds and helps prevent them from unnecessarily tying up multiple properties. Even FCBs run out of real money eventually.

2. The agreement between buyer and seller should stipulate clearly how long a contingency period you are expecting. This contingency period is intended to protect the buyer and give them enough time to investigate the property (and solidify their loan eligibility, if financing the purchase). Sometimes this is waived by buyers that feel they are aware enough of what they need to know about the property to move forward. Sometimes it is a short period of 7 days, just for them to schedule a home inspection and review the title records. Usually here in Orange County it is 17 days, to allow for a home inspection, a termite inspection, an appraisal (or multiple appraisals), HOA docs to be provided, and all of the rest of the seller disclosures to be reviewed. The contingency period can be even longer for more complicated transactions. Both buyer and seller agree on how long this period should be.

3. Before contingencies are lifted: hopefully the buyers are doing their due diligence and finding out enough about the property as they can. Obviously, if news comes up that changes their mind about the property (i.e. pending litigation, structural issues, zoning issues, noisy neighbor dogs, better competing property comes available, etc.) I think we'd all agree it is fair for them to be able to take their money back with them. That's what the period is for.

4. At the end of the contingency period: buyers either agree that they are satisfied with what they're buying for the price and lift their contingencies, or they cancel the agreement because it's no longer a "good deal" for them, or they ask for more time to perform additional review. With a few technical documents (NBP/ETA/CR), the sellers can then choose to agree to extend the period or decline and have the option to cancel themselves. This protects the sellers from being "held hostage" by buyers that refuse to lift contingencies and frees them to move on to other options. If there are no better options, sometimes the sellers decide not to exercise their right to cancel the deal, and continue to press on with these same buyers.

5. After all contingencies have been lifted: the buyers have agreed that the risk is worth the reward and they have actively signed away all of their contingency rights. However, LIFE HAPPENS and situations change and buyers can still have valid reasons to wish to back out.
As a seller, you'd want protection from a buyer arbitrarily backing out at this point, as was mentioned above.
As a buyer, you'd want protection if something happened such as a job relocation, health event, or other major life event changed and you were no longer interested/able to buy this home. You wouldn't want to have to be forced to buy the home.
So what to do to serve both parties' interests? What's the best solution?

6. Also in the contract, it's spelled out that cancelling as the buyer at this time would put your earnest money at risk (equal to what you put in as earnest money up to 3% of the purchase price, if both parties have endorsed that paragraph in the contract.) It's not "automatic" though... The seller would have to be able to justify that they've been "financially damaged" by the cancellation. When property prices were dropping like a zeppelin made of lead, that was not so difficult to do. When properties were skyrocketing, this was much harder to accomplish, since essentially the seller could now sell the home for MORE based on market conditions. Buyer and seller would have to agree on what the fair amount would be. If they are unable to come to a consensus, they'd move to mediation and/or then binding arbitration (also, only if they'd both agreed to that provision in the contract.)

Yes, it's a major PITA when a transaction doesn't make it all the way to fruition. For both parties, but for different reasons. Here's hoping that you don't have to deal with a failed escrow again in your future. Unfortunately, it's a statistical certainty that I'll see more in mine.

-IrvineRealtor

 

[irvinehomeowner]

@irvinehusky:

Ahh... didn't know that it was that long. And seeing how it took a year, I feel bad for you.

I do hope you got a sizeable portion of their earnest money, but I have a feeling it was not enough to cover your $100k drop.

 

[irvinehusky]

I'm not sure what the moral of my story is. 

Probably don't deal with shady agents.  But, when the market is an extreme buyers' market, unfortunately, you can't be picky.  I was being low-balled left and right and even was working on a private transaction.  But, I just felt uneasy about it.  He kept saying "you can trust me; don't you trust me?" and that we didn't need any agents involved. 

I think the takeaway I got from your story that it's better to not chase the highest possible price, but the most reliable buyer to close.

It's too bad there isn't time allotted to meet personally with buyers to get a sense of who's really in the deal and who is just slinging offers to see what's going to stick.

 

[irvinehomeowner]

First sign not to trust someone... when they say "You don't trust me?".