The term “earnest money” is used primarily in the real estate industry. That’s why some 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 purchase contract entered into with the seller. It is similar to a deposit on something someone wishes to purchase at a later time and is subject to legal regulations as established by Ohio law. 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 purchase contract not being met or removed due to no fault of the buyer. The buyer must be certain to act in accordance with the specific terms in the contract in order to be entitled to a refund of the earnest money.
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 purchase contract within 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. Be prepared to write a check, transfer the funds or provide the deposit using whatever method you utilize for making payments. Your REALTOR® cannot indicate to the seller that the earnest money deposit has been received, if that is not the case.
The Cincinnati Area Board of Realtors® Contract to Purchase states that the earnest money will be deposited within a specific number of days after the contract acceptance date. And, it provides that if written acknowledgement of the earnest money deposit is not provided to the seller within a specific time frame, the seller may terminate the contract.
Not all real estate purchase contracts provide a specific time-frame for depositing earnest money. In those cases, earnest money must be deposited in the escrow account within a reasonable time after receipt of the offer or contract acceptance (depending on the language in the contract). It is recommended that this deposit be made within 24 to 48 hours of receipt, unless the contract provides for a different time-frame.
Administration of the earnest money deposit falls under state regulation to protect the consumer. By law, the earnest money given to the REALTOR® with an offer/contract must be kept on deposit in a broker’s non-interest bearing trust account until closing, until both parties agree in writing as to is disbursement or until a court order is obtained.
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 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 and determination is made based upon the specific language contained in the contract.
Either party may file in court (small claims court if the amount of the earnest money qualifies) 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 through the Cincinnati Area Board of REALTORS®/Cincinnati Bar Association 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, in the event the contract contains certain provisions as established in license law, two years from the date the earnest money was deposited in the broker’s escrow account, 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: June 24, 2019