The importance of being Earnest… What exactly is Earnest money? How much is it? Where does it eventually go? Why is it called “Earnest Money”? Can it be cash? Where is it held? Is it safe? Will you ever lose it? Earnest money (EM) is the money that you put down on a property to show you are serious and will honor your offer when it becomes ratified. It is your money and will eventually be applied to the purchase price at the time of closing. It is part of the offer that becomes a contract.
How much is it? If it is a cash transaction is routinely 10% of the purchase price, i.e. a $90,000 purchase price = $9,000 Earnest money. It is totally negotiable how much it is, but routinely it is a percentage amount.
EM should always be held in a Trust Account. Most real estate firms and law offices have Trust Accounts registered with the Georgia Bar Association and the Georgia Real Estate Commission. The rules for maintaining Trust Accounts are extremely strict. Ledgers must be maintained and these accounts can be audited without notice. Mishandling EM is the fastest way a firm can lose their license and find a padlock on their doors!
It is called Earnest money because it is money paid to confirm an offer showing good faith to a seller on behalf of a buyer. In the past it could be a personal check but today’s transactions certified funds or wires are most often required. At Stewart Brokers we don’t accept money orders because unfortunately we have had forgery problems with those as well.
Where is EM held? This is defined by the contract. On the first page of the GAR (Ga. Association of Realtors) contract clearly states in items #6 where it is held, #8 how much and check or wire. If you are entering into a contract that is not written on a GAR form you should be very careful to note where the EM will be held before you sign it.
New home developments often use their own contracts. During the building frenzy years we saw new home contracts that stated the buyer’s earnest money would be held in the Builder’s general account. When the building frenzy cooled in 2008 and 2009 some desperate builders advertised $1.00, one dollar, as down payment earnest money as an enticement to get people to buy the homes. Was that clever or even legal? It is legal but not clever. They put a lot of houses Under Contract, precious few closed. The buyers walked away from the dollar earnest money if they changed their mind. As we all know entire subdivisions went into foreclosure. If you allow your earnest money to be placed in a general account you are taking a big risk. Money placed in a Trust account is being held “in Trust” for you. Money in a Trust account cannot be combined with other funds as in a general account. Co-mingling of funds in a Trust account is illegal.
So is EM safe? Yes, if it is held for you in a Trust Account it is safe. There is a part 2 of the “is it safe” question. The money a buyer placed in trust as good faith to a seller he would purchase the home is part of a legal and binding contract. That contract has time frames that are clearly defined such as inspection contingency, loan contingency and appraisal contingency. If all of those dates come and go, and then you decide to back out of the deal, your EM per that contract you signed and dated is in danger of being forfeited to the seller as damages for your failure to perform. The earnest money is not all that is at risk if you break the contract and walk. The seller can sue for nonperformance and loss of money over and above the amount of the EM. Will you ever lose it? Yes, if you allow someone to hold it outside of trust and that person or entity goes bankrupt. Yes, you will lose it if you fail to perform contractually in a timely manner.