When making an offer to purchase real estate, the buyer is typically asked to put up a good faith deposit. This deposit is referred to as earnest money or hand money. It means you are serious about the offer and willing to lose this money if you back out of the transaction.
Sales contracts often have contingencies that may allow for a return of the hand money. For instance, if the sales contract has a contingency for a property inspection and the inspector finds a problem that the seller had not previously disclosed to the buyer, this would be a circumstance in which the hand money would be returned to the buyer if the sale fell through due to the discovery.
The amount of hand money is negotiable and could be determined by local custom. In some areas you might get away with $500 but in others may be expected to put down $5000.
So for the readers who are buying, expect to have a hand money deposit and if you back out of a sales contract without a legitimate contingency failure, expect to lose the hand money.
For readers who are selling real estate and for Realtors who may be reading this, here are some pitfalls to avoid.
First, get the hand money up front. I firmly believe that the offer to the seller should be with a copy of the hand money check in hand. I don't like the idea of giving a buyer several days to come up with the money. The seller is being asked to make a decision of price and to take their property off the market and if there is no hand money, even for a few days, the buyer has nothing to lose by changing their mind and walking away from the deal. I suggest that sellers ask for a copy of the hand money check.
Second, make sure the real estate office deposits the check and is not holding it. You have to move the money into the escrow account to protect it and to have control. If the check hasn't been cashed then the buyer again has nothing to lose by walking away and stopping payment on the check.
What happens if the hand money check bounces? When you have a bounced hand money check, you have a big red flag that the buyer may not be truthful. Yes, it could have been a fluke and just a simple mistake but it also could mean you will have problems with the closing. If the hand money check bounces, even if you do get a good replacement check, Realtors should tell the seller and the title agent or attorney so those parties can be cautious.
Why might they want to be cautious? Well, what if the seller allows the buyer early access to the property for repairs, improvements, etc. then in the end the buyer can't get the mortgage or doesn't actually have the money to complete the transaction?
We've had two recent transactions involving fraud. It turns out that BOTH had bounced hand money checks and in both cases, the buyers provided replacement checks so the Realtors did not tell anyone about the bounce. One case was terrible as it involved the buyer presenting a counterfeit cashier check for a cash closing. He's incarcerated pending trial. The other case was stopped before it closed because we got a bad vibe and started asking questions. That's how we learned about the bounced check. With that info we suggested to parties that they be very careful and so that lead to the discovery that the letter from the bank that had been presented in the cash transaction was a fraud.
The earnest money aka hand money deposit is a meaningful part of the transaction and its importance cannot be overlooked. It is the first test of the willingness and ability of the buyer to perform under the terms of the sales contract. Be a savvy buyer, seller, and Realtor. Make sure that everyone is serious about that first deposit. It lays the foundation for the transaction.