“Earnest money” functions as the up-front “deposit” made by a buyer in conjunction with the signing of a real estate purchase agreement. It serves as buyer’s good faith gesture to give the seller more confidence that the buyer is serious about purchasing the property in question.
The amount of earnest money is negotiable between the parties as there is no legally-mandated amount, or any firmly-established formula widely used in the industry. In the St. Louis real estate market, however, buyers typically deposit between 1-2% of the offered purchase prices; for example, on a $300,000 purchase offer, the earnest money will typically be in the range of $3,000 – $6,000.
Sometimes called a “down payment”, the buyer will receive a credit for the earnest money when the transaction is completed. This credit will be reflected on the buyer’s closing statement, along with a credit for any applicable loan proceeds, to determine the final amount of money that buyer needs to bring to the closing table.
The earnest money, however, may be returned to the buyer if the buyer properly terminates the contract according to one-of-several “contingencies” – such as the building inspection; title & survey; and financing/appraisal contingencies. The buyer must be timely with terminating the contract, as there are solid deadlines for each contingency.
Finally, the earnest money may be claimed by the seller if the buyer fails to fulfill its obligations under the contract. In the standard agreements to buy, including those in the Metropolitan St. Louis area, the seller can either choose one of the following options:
- accept the earnest money as “liquidated damages” for the buyer’s contractual breach; or
- not accept the earnest money to instead pursue other legal remedies including asking the circuit court to mandate that buyer consummate its purchase of the real estate.
Let’s take a look at how earnest money works, and what buyers and sellers need to know about it.
Earnest money can be a bargaining chip in a hot market
Aside from the legal technicalities – for example, no earnest money is generally necessary to make a contract enforceable – there are strategic relevancies to consider in this area, particularly in the current seller-friendly real estate market.
While not the most important variable to a seller, if a buyer leaves the earnest money line blank, or with a very low offering, this could discourage the seller from taking the offer seriously.
In a hot (seller’s) market, where real estate agents are trying to draw attention to a client’s offer, a higher earnest money deposit can make a contract more appealing to a seller, especially when competing against many other offers.
A higher earnest money number shows the buyer is serious about their offer, while also providing protection for the seller if the buyer fails to close the transaction exactly as outlined in the contract.
Title company’s role as the “holder” of your earnest money & when it can be released
Once a contract is signed, the buyer sends a copy over to the title company, usually with the earnest money check or wire.
If the buyer properly terminates the contract under one of the contingencies, the title company will require that both parties – seller and buyer – submit a written “mutual release” document to confirm that both parties acknowledge the deal has been terminated. Upon receipt, the title company will return the earnest money to the buyer.
Sometimes, however, the seller will not sign the mutual release because the seller believes that buyer did not properly terminate the contract under one of the applicable contingencies. In this case, even if the title company may not agree with the seller’s interpretation of the situation, the title company will hold the money in escrow until the parties reach a resolution and submit a mutual release.
If a certain amount of time passes, without the parties reaching an agreement, the title company will be forced to interplead the funds into the local circuit court – in other words, the title company pays the funds into the court’s registry – with the seller and buyer then obligated to appear before that court to make their arguments regarding who gets the earnest money.
Reasons that a title agency may not be able to release the earnest money:
- Contractual vagueness: Modifying the standard form contract, by inserting language into the “special agreements” section, for example, is a risky proposition. If this added language makes it more difficult for the seller to confirm full-and-unequivocal compliance by the buyer, the seller will be more hesitant to sign a mutual release.
- Disputes over documentation: When a financing contingency is applied, the buyer might provide a loan rejection letter from the lender along with notice of contract termination. However, if there is any suggestion that buyer was denied financing because the buyer did not submit all loan application information, or that buyer otherwise failed to exercise full efforts to obtain financing, the seller may be hesitant to sign a mutual release.
- Easement already recorded in the public land records: A buyer might want to terminate the contract based on an easement identified in a boundary survey – but the seller might, in turn, argue that this information was publicly-available information prior to signing the contract and, thus, does not constitute a survey matter.
Despite having attorneys on its title underwriting team, True Title cannot represent either party from a legal perspective or provide legal advice. Instead, as a fiduciary intermediary between the two parties, we will make reasonable effort to facilitate an agreement between the buyer and seller by sharing information and giving title-specific feedback to resolve the dispute before involving the courts.
Contingencies help protect your earnest money
So how can you make sure that your contract doesn’t have any “grey” areas in it? The answer is contingencies – and precisely following the terms of those contingencies.
When a buyer submits an offer, the residential contract generally includes the sales price, the earnest money amount, and a series of contingencies. Generally, these include:
- a contingency to review status of title
- a contingency to order a boundary survey
- an inspection contingency
- an appraisal contingency
- a financing contingency
These contingencies allow the buyer to do their due diligence, and in the case of the financing contingency, give the buyer time to seek financing approval (and, as we all know, pre-approved loans are the best way to go). The more contingencies, the more opportunities the buyer has to walk away from the deal – and reclaim their earnest money – if they encounter an issue.
Avoiding an earnest money dispute
Buyers can ensure they retain the right to earnest money by sticking to contract contingencies and respecting all time deadlines in the contract – most notably the contingency periods for due diligence.
In St. Louis, unless the parties modify the standard real estate contract or use a different form altogether, the standard timeframes for contingencies are:
- 10 days for the building inspections
- 15 days to confirm availability of homeowner’s insurance on the property
- 25 days for title and survey objections
For the “financing contingencies,” which allow the buyer to terminate because buyer could not secure a loan, or because the property did not appraise at the contract value – are negotiable, but generally buyers will request between 15-30 days in this area.
Agents representing buyers can protect their clients by providing an itemized list of due diligence deadlines and helping manage the various elements on the list.
It is vital that any-and-all “grey” areas be identified and clarified, and that the buyer timely and clearly communicates any attempts to invoke the contingency protections. Again, the due diligence timelines must be met to preserve the buyer’s rights in this area.
Crucially, if real estate agents add special provisions to the contract, this should be done very carefully and with the earnest money issue in mind. If in doubt, they should consult with their managing broker and/or legal counsel with regard to any changes that could impact the contractual rights between the two parties.
On the seller’s side, it’s always a good idea to consider the cost-vs-reward of disputing an earnest money issue. In a hot market, disputing the earnest money can tie-up a property and prevent it from being relisted right away. It’s generally not worth keeping a property off the market, even temporarily, if in a seller-skewed market.
At the end of the day, pragmatics win.
For everybody involved in a home purchase, we recommend not getting hung up on principle, but to consider the transaction from an economics perspective. We understand that buying or selling a home can be emotional, but suggest that buyers and sellers alike set aside any personal issues, spite or efforts to get the last say. If it’s going to cost more money than is being held in escrow to dispute an earnest money claim, it’s probably worth moving on. If concerns do arise, agents can liaise with senior brokers or the title company to discuss any questions – and make sure any earnest money issues are quickly and seamlessly resolved.