You’ve heard about it, been asked for it; you may have even written a check for it. What exactly is earnest money, though, and why do you need it when you buy a house?
Earnest Money FAQ
When buying (or leasing) a home in Scottsdale, you will be asked to put up a good faith deposit to secure your position in the transaction. This consideration is known as an earnest deposit.
Earnest deposit amounts are negotiable. The amount of the deposit is one of the terms of the purchase agreement over which buyers and sellers may haggle. In my experience, a typical earnest deposit on a resale transaction is approximately 1-2% of the total sales price. Builders may require higher deposit amounts for brand new construction (largely due to the costs incurred to build your home). Banks may also require more on REO/foreclosure properties (because they are the spawn of Satan).
If you are following the standard boilerplate terms of the current AAR (Arizona Association of Realtors) purchase agreement, your earnest deposit is due upon the agreement being accepted and signed by all parties.
In nearly all cases, your earnest funds will be held by an escrow company, the neutral third party responsible for transferring ownership from the seller to the buyer. The company employed to hold these funds is another term of the purchase agreement that you negotiate with the seller. Earnest money can also be held in the trust account of one of the Real Estate brokers involved in the transaction, but this eventuality is primarily restricted to the rental arena these days. If you are buying a house, you can pretty much take it to the bank that you will be dealing with an escrow company.
- Is This Extra Money That I Have to Pay in Addition to My Down Payment and Closing Costs?
This is a common misconception. The answer is no, this is not “extra money” that you are being charged. It is a portion of your total closing funds that is simply due up front. Upon closing, your earnest deposit will be applied towards your down payment and/or closing fees.
Typically, a personal check made payable to the chosen escrow company will suffice, though some opt to wire funds to the escrow company instead.
- Can I Get My Earnest Deposit Back?
This is a loaded question, but yes, there are scenarios in which you can typically retrieve your earnest deposit. Assuming you negotiated the sale using the current AAR purchase agreement, you do have a few outs. First, you have an inspection period (usually 10 days, but negotiable). If you are not satisfied with the condition of the property, or the seller refuses your repair demands, you can withdraw from the transaction and have your earnest money refunded. Of course, this presumes that you have not agreed to any changes in the standard terms of the contract (such as purchasing “as is”, agreeing to non-refundable earnest money, etc).
Under the standard provisions of the contract, you can also get your earnest money back if your loan is declined (after your diligent effort to obtain one under the stated terms) or the home doesn’t appraise for the purchase price (unless you are paying cash as there is no appraisal/financing contingencies to fall back on). Once again, though, and I can’t stress this enough, the terms you negotiate with the seller can alter these provisions.
- What If My Deposit Turns Out to Be More Than I Owe at Closing?
Let’s say that you are employing a 100% financing vehicle, like a VA loan. Let’s also say the seller has agreed to pay for the majority of your closing costs. If the remaining costs owed by you at closing are exceeded by your initial earnest deposit, you are entitled to a refund of the excess deposit.
- Can I Lose My Earnest Deposit
Yes, you most certainly can forfeit your earnest deposit. As the purpose of this deposit is to demonstrate good faith to the seller and invest you in the successful completion of the transaction, your deposit can be forfeited to the seller as damages if you breach the agreement. Failure to close escrow, or backing out of the deal for any reason other than allowed for by a contingency to the agreement, is a surefire way to kiss your deposit goodbye. In the event that you wish to cancel a transaction, be sure to carefully review the terms of your contract with an attorney.
- Who Decides If the Buyer or Seller Gets the Earnest Money if There is a Dispute?
The escrow company that holds the deposit is charged with interpreting the terms of the contract, and has the authority to release the deposit to the party deemed NOT to be in breach of the agreement. Say you, as the buyer, decide that you aren’t comfortable with the neighborhood’s governing covenant’s, codes and restrictions (CCRs). You inform the escrow company (in writing) of your wish to cancel the transaction. The seller objects, claiming that you did not exercise your right to cancel in a timely fashion. You had 5 days from the receipt of those documents to withdraw from the purchase contract, but did not inform the escrow company of your intentions until day 7. Therefore, the escrow company decides in the seller’s favor, and releases the earnest money to him/her as liquidated damages for your breach of the agreement.
Have any additional questions regarding the role of earnest money in a Real Estate transaction? Ask away in the comment section below (or shoot me a private message if you prefer) and I will do my best to address them.
* It should go without saying that the above is not intended as legal advice. The general explanations may not directly apply to you. As every purchase contract is unique, the internet is not a reliable source for answers to questions regarding your specific agreement. Consult with your agent and/or attorney PRIOR to the execution of your purchase contract to fully understand the terms and protections afforded you.
The closing table is no place for incompetence. The crescendo to a Real Estate transaction, the signing of loan documents and the final settlement statement is representative of a successful navigation of the escrow obstacle course. If it were a cinematic experience, an empowering musical score would soar over the montage of conquered struggles that it took to get to this point. While a few credits have to roll before the buyer can officially call the property home, namely lender funding of the loan and recordation of the deed, smiles and handshakes accompany the last executed signature in the two inch stack of paperwork, nonetheless. In years past, agents and consumers alike have been spoiled by the well-oiled machine that was the title and escrow field. Catastrophes arose, catastrophes abated and we lost our minds if a closing was delayed twenty four hours by unavoidable eventualities.
These days, I consider myself lucky if a closing isn’t delayed two weeks and my clients draw anyone other than Sparky, the one brain-celled signing agent.
With new disclosure regulations, a completely different settlement statement and a host of new concerns with the transfer of clear title due to the pervasiveness of foreclosure and short sale properties in our midst, an accomplished escrow officer has never been more vital to the process of a home sale. Unfortunately, many of the good ones were forced out of the industry when the market hit the skids in 2007. When sales finally began to rebound, the major title/escrow companies restocked their ghost offices. As the predominance of these properties were distressed, however, it was the REO (bank foreclosures) and short sale divisions that welcomed new staff. The resale divisions remain largely undermanned.
The REO division of a title company is an entirely different universe. Like that of a REALTOR who specializes in listing bank property, transactional volume is ludicrously high. Too many files on too few desks. You can imagine how this translates to the urgency with which your file gets treated. Another component that is not necessarily to the buyer’s benefit is the relationship between the bank and the title company they have procured. Supposedly a neutral third party whose purpose is to convey the property from the current owner to the buyer, the myth of its transactional Switzerland is a tale taller than the Alps. If the sheer dollars involved in a title company’s relationship with a bank (or the bank’s asset management affiliate) does not dictate outright obedience to the demands/whims of one party over the other, it sure does influence behavior. I have been nonplussed during the course of bank property transactions (the buyer MUST use the bank-selected title company if his/her offer is to be accepted) in which the title company is the one contacting me with seller demands, essentially performing the role of the listing agent by proxy.
It is expected that one will have to tolerate a third party that is subservient to its master in a bank property sale (and not overly concerned with getting the file closed in a timely fashion to boot), but problems are now creeping into “normal” resale transactions between living, breathing human buyers and sellers. For starters, with many resale divisions depleted of adequate staff, it is not an unlikely scenario to get stuck with an escrow officer who primarily handles REO accounts. Flip a coin between whether said officer is overworked or under-experienced, but too often lately a less than exemplary job is being done. Documents are not being requested/delivered on time, assistants are left to answer questions they are not ready to field, communication between the officer and the buyer’s lender is nonexistent … I’ve even encountered “signing agents” at closing who are neither the selected escrow officer, nor capable of explaining the documents upon which they want your signatures. One clown literally tossed the paperwork in my lap and told me to explain it all to my clients. Had I not been rendered utterly speechless, I would have ordered the hall monitor to escort the fresh lad to detention.
Mind you, these are not mom & pop style title companies, but reputable names that do a very high volume (perhaps too high?) of business.
The moral of the story? Unless you are purchasing a bank property, and thereby resigned to the amusement of escrow fate, you have a choice in the matter. As the buyer, you get first crack at naming the title company in your initial offer. Sellers (upon direction from their chosen representatives most often) may list their own preferred company amongst the terms that are countered, but don’t cave. Unless your agent can point to specific, positive dealings with said officer/company in the past, I urge you to stick to your guns. Going back four or five years, a title company was largely a disposable part of the negotiation. As long as you got your price, you let the other party get the perceived “win” of naming the company. The recent changes to the escrow landscape make such a laissez faire approach to the title work fraught with peril. Make this term non-negotiable. More often than not, the other party will buckle rather than lose a sale over what many still consider a minor point.
When selecting a company, your chosen agent is the best source of advice. We have favorites for a reason, and it is not monetary. Through trial and error, we find excellence in all of our affiliates. When we find a diligent service provider, we are loyal. In this day and age, though, a little prevent defense is still warranted. Ask your agent who underwrites the title policies of his recommended escrow company (title and escrow are not necessarily synonymous) before satisfying yourself as to its viability.
I happen to use Jenny Werner with First Arizona Title. Her policies are underwritten by the big boys at First American. She chaperones her files quite adeptly to prevent avoidable delays and miscues, and is very responsive to consumer questions/concerns. Whether you employ me to assist you in the purchase of a home or not, I highly recommend you write Jenny’s services into the agreement. Your movers and peace of mind will thank you for it. Eventually, the other party will as well.
Jenny Werner, First Arizona Title
11333 N. Scottsdale Road
Scottsdale, AZ 85254
Phone: (480) 385-6500
Fax: (480) 385-6800
It’s true. In Arizona, you will rarely get the keys to your new home at the closing table. Despite the fact that you wired in the balance of your down payment funds or marched a cashier’s check into the title company on what you thought was the penultimate day, the home is not yet yours. You see, unlike other parts of the country where all parties congregate around the closing table to officially finalize the escrow process, there are still a few remnants of hanging fire that must be doused before your new home is officially, well, your new home.
If you relocated from back East, you may be surprised to find the title officer and your agent (hopefully he/she is in attendance) as your only companions at signing. Buyers and sellers typically have separate signing appointments, so if your loan documents arrived at the title company three full days prior to the scheduled closing date, as stipulated in the boiler plate of the standard Arizona Association of Realtors contract, you might actually execute your portion of the documents before the seller does. Until both parties sign their respective closing docs, the property cannot be transferred. Even if the seller has signed off prior to your appointment, however, there are a few additional factors that preclude you from taking immediate possession of the property.
The closing appointment at which the buyer signs the loan documents is not technically the “closing” because of a few missing components. Most important among them are the funds from the lender. While you may have already brought in the balance of the funds required of you (down payment and closing costs), most lenders do not release their funds until they receive and review the loan documents that you sign at your closing appointment. Some lenders will “table fund,” meaning they will release the wire to the title company without review of the documents, but that is atypical. Needless to say, until the money from your lender hits the title company’s coffers, the moving truck you have scheduled is going to have to keep circling the block. From the time of your signing, it will usually take 24-48 hours for the lender to fund the loan. This, of course, assumes that there are no problems or discrepancies found in their review of the signed documents.
Okay, so you signed your documents, wired in your down payment and just learned that the lender has funded your loan on the scheduled day of closing. Woohoo! The house is finally yours! Now where’s that key? Not so fast. Even though it is tantamount to a rubber stamp, the title company still has to submit the deed to the county for recording. This is an automated process these days and is done en masse, but the home is not yours until we receive confirmation that the deed has been recorded. It is then, several days after you signed the paperwork and deposited your money that your Realtor shows up with your keys and a thousand watt smile.
The thing to keep in mind when considering the logistics involved in closing is that you will have nothing to do on the actual close of escrow date. The signing of documents and deposit of monies, if handled correctly, will be done in advance. Keep this in mind when discussing closing dates with your agent as part of the initial negotiation, as miscommunication (we agents sometimes forget that people don’t understand all of the minutia involved in the sale of property) might lead you to take the wrong day off work or schedule the movers incorrectly. Plan on being physically available two to three days prior to the agreed upon closing date (as it is stated in the contract) to do your part. Some people schedule the movers for the closing date, but this is a mistake. Because the home is not yours until it records, and there is no way to know whether it will record at 9 in the morning or 5 at night, you will save yourself a lot of potential misery by scheduling the truck a day or two later. With the recent delays that have been caused in many transactions by various, and dare I say, draconian changes within the lending industry, a little buffer is advisable.
Now that you have a handle on the closing process, we’ll backtrack a bit in the next installment of the Scottsdale Property Shop home buying series as we take a closer look at the inspection process in, “They Have to Fix That, Right?”