Earnest Money: A Show of Good Faith
Buying a home can be complicated. Finding a real estate agent, the right neighborhood, looking at properties, putting forth an offer, and running through the closing process are just a few of many steps in the process. Despite the lengthy process, yet another stress becomes the added inclusion of earnest money.
What is Earnest Money?
Earnest money, sometimes referred to as “good faith money”, is an amount of money that the buyer(s) will deposit at the time the contract is accepted. This is done to show the seller you are motivated to make sure you close on the house.
Once an offer is accepted, the mortgage lender will work to have your loan approved. Although earnest money is paid once the offer as accepted, it’s all too often not discussed ahead of time. Unfortunately, this type of oversight can lead to a stopping point in some contracts, so, for buyers, it’s best to present earnest money as one of the terms of your offer.
In a competitive market, a potential buyer may state they will place a higher amount of money than what’s initially requested by the seller. This can be a good negotiation tactic as it to help beat out competitive bids.
Once the offer is accepted, the earnest money must be paid by the buyer to a party designated to hold the money while the house is under contract. Earnest money is typically held by the Seller’s broker for the benefit of the parties but can be held by the Buyer’s broker, an attorney or a title company..
But what happens if the contract fails?
This is where the waters tend to muddy.
If a buyer fails onto their obligation to fulfill the contract, the seller maybe entitled to receive the earnest money due to the failure of the buyer to close. Release of earnest money requires both the buyer and seller to sign a joint direction to the party holding the earnest money. If the parties cannot agree, a la suit may be filed by one or both of the parties or the party holding the earnest money. The earnest money typically is designed to put the seller in the position he would have been in had the contract been fulfilled. Illinois courts typically “abhor a forfeiture” and often will reimburse the seller for any losses he or she may incur due to the breach of the contract. This is something that can be costly and is usually not worth litigating..
However, there are exceptions in the purchase contract that can lead to the buyer to reclaim the earnest money at the end of the day, provided the time frames contained in the contract are followed.
Some of these include:
The buyer is unable to obtain a mortgage for the purchase price. One example could be due to the property in question receiving a low appraisal or that the buyer is not credit worthy to obtain the mortgage he or she needs to purchase the property.
When the home is inspected, material issues arise that are not able to be resolved by agreement the parties.
An attorney reviews the contract and the contract is not approved or other issues arises. Often there is a limited amount of time for an attorney review of the contract to take place after the offer is accepted.
Both the buyer and the seller agree to terminate the contract and agree to have the earnest money return to the buyer.
However, sometimes buyers want out of contracts without a strong reason. Without actual cause, as described in the above scenarios, a buyer could very well lose the earnest money.
Do I Need an Attorney?
When it comes to the return of earnest money, contract disputes may arise. Seeking legal advice, especially when a seller does not consent to the return of the earnest money, can help one understand their legal rights and remedies. Contracts have multiple exceptions and because a seller refuses to agree to the return of earnest money does not mean there is not recourse for the buyer. An attorney can help determine the best course of action.
For help with earnest money and other questions pertaining to residential real estate, send us a message at LeePerres.com.
