earnest money aka hand money

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.

query: seller won't release earnest money - pa

Earnest money also called hand money is a good faith deposit made by the buyer in a purchase transaction.  Earnest money shows the seller that the buyer is serious and willing to put money at risk in exchange for the seller taking the property off the market while the sale is pending.

When there is a real estate broker involved the money is held in the escrow account of the brokerage.  In FSBO transactions [for sale by owner] the buyer often gives the money directly to the seller.  Alternatively, the money may be held by an attorney or other escrow agent.

Hopefully the parties have signed a sales agreement which clearly sets out the terms of a default and under what circumstances the seller may keep the earnest money.  When the buyer defaults on the agreement, one option the seller has is to keep the earnest money.  Another option is to sue the buyer for specific performance and force the buyer to close.

So, if the buyer defaults, there should be no expectation that the seller will release earnest money.  BTW - changing your mind about the purchase is considered default. ;)

Now, if the buyer did not default and the earnest money is in the hands of a third party escrow agent, say the real estate broker, an attorney or other, then that party can read the terms of the contract and release the deposit without the consent of the seller.  An escrow agent will only do this if the terms are crystal clear.  Otherwise the deposit will sit in escrow until the parties resolve their differences.

If the buyer was foolish enough to give the earnest money directly to the seller and the buyer did not default under the terms of the contract and the seller refuses to release the earnest money, then the buyer will likely have to hire an attorney and sue - or at least threaten to sue.

The worst case I have ever seen was a transaction in which the buyer gave the seller the entire purchase price of $100,000 based upon a few notes written on the edge of a survey map which they all signed.  The buyers were from out of town, looking for land, fell in love with a parcel owned by a man who met their expectations of an old fashioned nice guy.  The seller created such an impression and a sense of urgency - there were other interested parties, etc. - that the buyers whipped out their checkbook and BOOM, there went $100,000. 

This "nice guy" drove 2 hours and arrived at my office a few minutes past five, unannounced, to order the title work.  He told the buyers he would take care of everything.  I truly believe he wanted someone who didn't know him and he wanted to be the one to place the order, thinking he would control the outcome.  I explained that the title insurance was being issued for the benefit of the buyer and that we would keep him in the loop but that we would be communicating with the buyer and reporting our findings directly to the buyer.

As you can guess, the seller wasn't who they thought he was.  He and his wife had all sorts of financial problems and I think they started spending that $100,000 as soon as they had it in their hot little hands.  What we found in title caused the buyer to NOT purchase the parcel.  At my recommendation, they hired an attorney - in fact they ended up working with two attorneys and after a couple of years, I did end up testifying in court on their behalf.  I don't know if they ever recovered all of that deposit.

So, as you can see, be careful about earnest money.  Take seriously your obligations under the contract, think about how and if you have a chance of recouping the deposit if the transaction does not close.  If you do not understand the terms of the sales contract, seek the advice of a good real estate attorney.