Jim Valentine: Earnest money deposits

Jim Valentine on Real Estate

Jim Valentine on Real Estate

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When entering a real estate transaction, you will find yourself being asked how much of an earnest money deposit you want to make. Unless you buy and sell on a regular basis, that may catch you off guard. It is, however, an important component of the offer and acceptance process. The EMD is a good faith deposit that a buyer makes to indicate that they are serious.
It is a payment that you will make at the time of signing the offer, or within a few days after acceptance that will go into escrow and be credited to you at the close of escrow. The amount is often done in accordance to local customs, but in Northern Nevada there are no such customs for deposits. They can be anywhere from $500 to $5,000 or more depending on the transaction and the circumstances surrounding it.
Big deposits can be used to strengthen a cash offer, but if you have a zero down loan situation you likely don’t have the cash for a big deposit. Each has its own merits for its circumstance. The deposit is really only as good as the party making it. If someone is of questionable character the amount of the deposit won’t really matter. We’ve had a $100,000 EMD that the buyer flaked on the deal and forfeited, and we’ve had a $1 EMD that we had to put up the buck for… and we closed on that one.
EMDs are given with the understanding that there are contingencies in the transaction that must be met, or the deposit will be returned to the buyer less any costs they’ve incurred in the escrow. Contingencies are a future event or circumstance which is possible but cannot be predicted with certainty which includes without limitation: financing, physical inspection, pest inspection, roof inspection, water quality inspection, appraisal to come in at value or higher, loan approval, sale of another property, etc.
Sometimes EMDs are made non-refundable when certain conditions have been met. This doesn’t happen often, but it can be a good tool to help buyers and sellers feel comfortable with the other party’s commitment to the transaction. To get your EMD back in a conventional transaction will depend on why the contract was, or will not be, consummated. If it is due to a buyer’s inability to fulfill his obligations or the property doesn’t qualify, the EMD will be returned per the boilerplate terms of the contract.
There are times when a seller or buyer, in the case of forfeiture, won’t sign to release the EMD. This is not a good idea if the contract provides for it to be returned given the events of the transaction, but people don’t always do the right thing. In such situations the usual course of action is an interpleader action. It is a legal action that takes time and costs money. Not fun for either party, but when people act out it usually isn’t fun.
If the sale is contingent on the sale of a home, the deposit is actually moot. It is refundable if the home doesn’t sell so don’t get excited until it is under offer. You can provide for a deposit increase when it goes under contract, but before that you will just have to give it back if their home doesn’t sell. You can use this mindset for other conditions as well, depending on the timing and likelihood of a positive outcome of the condition.
Sometimes parties to a transaction, or their agent, put too much emphasis on the EMD without understanding its context in relation to the rest of the transaction. Don’t fall into the one size fits all category. Each EMD should be in accordance with the terms, conditions of the contract, the nature of the property and the objectives of the buyer and seller.
Deposits are important, but don’t lose a good transaction by losing your perspective about them. What counts in the end is the close of escrow.
When it comes to choosing professionals to assist you with your Real Estate needs… Experience is Priceless! Jim Valentine, RE/MAX Realty Affiliates, 775-781-3704. dpwtigers@hotmail.com.


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