The term “earnest money” is used primarily in the real estate industry. That’s why many first-time home buyers, when making an offer on a house, are not prepared when asked how much earnest money is going to accompany the offer. When you think about it in terms of placing a deposit down on an item you want to purchase, it’s easier to understand. Yet, not knowing the procedures for handling earnest money can create a confusing situation.
Earnest money is a financial pledge from the buyer that he/she will make a diligent effort to fulfill the terms of the Contract to Purchase presented to the seller. It differs from placing a “deposit” on an item you intend to purchase in that it is subject to legal regulations. Just as with a deposit, earnest money is not always refundable.
When there is a closing on a property, earnest money is disbursed as directed by the buyer; usually credited toward the selling price of the property. If the transaction does not close, the money can be disbursed to either the buyer or seller, depending on the reason the closing did not occur.
The earnest money is returned to the buyer as long as the failure to close was due to contingencies included in the Contract to Purchase not being met or removed due to no fault of the buyer.
However, if the buyer fails to perform in accordance with the terms of the contract, the money may be forfeited to the seller.
Earnest money deposits are not required for the creation of a valid and binding purchase agreement. However, it is rare that a residential real estate transaction does not include an earnest money deposit. The reason for this is that an earnest money deposit demonstrates to the seller that the buyer is serious about his/her offer. Although the amount of the earnest money deposit varies, it is usually enough to motivate the buyer to take whatever measures are necessary to perform as outlined in the Contract to Purchase in the time-frame specified.
When you are ready to make an offer on a house, be aware that an earnest money deposit will be requested. Don’t be surprised and then provide only part of the earnest money or indicate that you will provide the check later. Your REALTOR® cannot indicate on the Contract to Purchase that he/she has received the earnest money deposit if that is not the case.
Administration of the earnest money deposit falls under state regulation to protect the consumer. By law, the earnest money given to the REALTOR® with the Contract to Purchase must be kept on deposit in a broker’s non-interest bearing trust account until closing or until both parties agree in writing as to is disbursement.
Generally, earnest money must be deposited in this account within a reasonable time after receipt of the offer. It is recommended that this deposit be made within 24 to 48 hours of receipt.
However, the Cincinnati Area Board of Realtors® Contract to Purchase states that the earnest money will be deposited “upon acceptance of this contract, in a trust account pending closing, or returned to the buyer if this offer is not accepted.” The broker can wait until the offer is accepted to deposit the earnest money or return it to the buyer if the offer is not accepted.
Remember that your REALTOR® serves only as a caretaker of the earnest money. Should any dispute arise between the two parties to the transaction as to who should get the money in the event the property does not close, the broker must keep the money on deposit until the dispute is resolved.
What if a buyer is unable to go through with a Contract to Purchase due to being turned down for a loan, for example, and the seller refuses to sign the earnest money release form? What if the property does not appraise for the purchase price? Or, what if an inspection reveals something about the property that the buyer does not like? These kinds of disputes are often resolved in court. Either party may file in small claims court (depending on the amount of the earnest money) in order to have a judge tell the broker who should get the money. Or, the parties may jointly agree to have the dispute heard by a panel of Arbitrators at the Cincinnati Area Board of Realtors® through our Earnest Money Arbitration program. Unless both the buyer and seller agree on who gets the earnest money, the broker must wait for a court order or instruction from both parties to participate in an arbitration program before releasing the deposit.
In most cases, though, earnest money is collected, the process continues smoothly and the deposit is disbursed as indicated in the contract.
Date: April 7, 1998