Hefty Deposits
A recent experience reminded me why I encourage getting large deposits when negotiating real estate. After being under contract for several weeks, the buyers, who had signed an all-cash offer for $250,000, called their agent to inform him that they did not have the money to fulfill their contractual obligations and wished to forfeit their earnest money deposits. The buyers had $22,500 in escrow.
In Florida, buyers pay earnest money deposits, which are escrowed. One of my tips for ensuring that written transactions have a chance of closing is to always collect between 3 to 5 percent of the contract sales price as your good faith escrow binder. In Wisconsin, earnest money is not typically escrowed but is held in the listing broker’s trust account; the parties may agree to have a third party hold the earnest money. The parties or their attorney should draft the escrow agreement stating the terms of the third party holding the buyer’s earnest money. There is no standard to the amount of earnest money; each firm has its own guidelines, so be familiar with and follow your office’s guidelines. Community standard of practice may also help to establish the typical amount of a buyer’s earnest money.
“Good Faith Sum of Money” is the earnest money that a buyer commits to show the seller that they’re serious. This money is given to bind a contract, for example, an agreement to purchase real property. In my experience, most times, buyers make a small initial deposit and then a more substantial deposit within the next 10 days to two weeks, bringing the total held in earnest money to about 5 percent. This deposit in a Florida transaction is typically an additional amount of money put into escrow and usually is paid after inspections are complete and approved by the buyer, and the additional deposit is a few days after the inspection period and two to three weeks after the contract is signed. Knowing the law concerning escrow monies is critical, as in my state of Florida, an offer to purchase with no binder money down is just as valid as an offer with accompanying binder money.
Earnest money amounts can vary. If the sale goes through, the earnest money is applied against the down payment or as per the terms of the Wisconsin offer against the purchase price. In Florida, if the buyer is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded. If the purchaser of Florida property wants the down payment to be refundable, the agent should insert a clause in the offer specifying the conditions under which the deposit will be refunded. In a Wisconsin transaction, the offer states that the earnest money shall be disbursed according to a written disbursement agreement signed by all the parties to the offer. Review lines 370-394 of the WB-11 Residential Offer to Purchase for the discussion on earnest money.
With signs of improvements in many markets across the country, finding yourself in a multiple offer situation is likely — and this strong likelihood justifies a substantial deposit to ensure that the buyer’s offer is not compromised. Imagine a multiple offer situation and most other terms and conditions in both offers were quite similar, but the one big difference was the earnest money deposit amount. Without coaching the buyers on the importance of showing commitment from beginning to end, they may lose the opportunity to buy. As mom taught us — you never get a second chance to make a good first impression!
It is wise for a seller to require buyers to show a solid monetary commitment if they wish the seller to take their property off the market. Buying a home is a fun and exciting experience, and putting down earnest money is just one of the many steps to get there. Be direct when asking for the buyer’s solid commitment in placing earnest money … you and your seller will appreciate your business approach to this critical element in a real estate transaction.