Earnest money failures

One pitfall in real estate purchase contracts – residential and commercial — involves the failure of the parties and the Realtors to assure that earnest money called for in the contract has in fact been collected and placed in the Realtor’s escrow account.

Earnest money is a deposit made by the buyer that is applied toward the purchase price at closing or disbursed in accordance with the purchase agreement.  The act of a paying an earnest money deposit is a good faith showing to the seller that the buyer is serious about purchasing the real estate.  (Read here and here that it is nothing more than that.)

More often than not, sellers will require buyers to deposit earnest money to avoid wasting time in an already time consuming process.  Generally in real estate transactions, the escrow is the account in which the earnest money is safely kept until the time of closing or until some other triggering event occurs.  An escrow agent or a real estate broker is appointed to manage and disburse the escrow funds in accordance with the purchase agreement.  The escrow agent or real estate broker acts as fiduciary for both the buyer and seller.

Under the standard Cincinnati Area Board of Realtors contract, there is a section below the buyers’ and seller’s signatures where the Realtor is supposed to acknowledge receipt of the earnest money.  If that is completed and signed by the Realtor, the buyer and seller should be able to rely upon that signed receipt in proceeding with the transaction.  If the check later bounces, the Realtor holding the escrow likely has a duty to inform the parties of that occurrence.

Conversely, if the receipt is not signed by the Realtor, the Seller should assume that the earnest money has not been paid, and – assuming that is a material part of the consideration he wants to assure buyer performance under the contract – he should follow up with the buyer’s Realtor to assure that check has been received and deposited, and get a signed receipt for the same.  Absent that assurance, the seller could and likely should terminate the purchase contract and sell it to a more reliable buyer.

A failure to deposit the earnest money in the escrow account will likely constitute a breach of the purchase agreement by the buyer.  Once a breach occurs, the seller may be able to force specific performance from the buyer or completely walk away from the deal.  A buyer in breach who still wants to purchase the real estate may be out of luck if the seller decides to terminate the contract or renegotiate for a larger sum.

We have seen circumstances in which real estate investors who are simply trying to tie up property to see if they can quickly flip it, will sign a contract with loads of contingencies, and never actually pay the promised earnest money.  (Read more about that here.)  Obviously, sellers want to avoid tying up their property with these bogus buyers.

The lesson here is that the seller should confirm the earnest money deposit is in the selling Realtor’s escrow account by getting written acknowledgement of that.  Buyers are forewarned that in this hot real estate market, the failure to pay that promised sum into escrow could result in termination of the contract by the seller.