Moving day is here! You’ve had your home on the market for two months, got a great offer, accepted, and been in escrow for the last month and a half! About three weeks in it seems like everything is good to go, the buyer’s agent has assured you they have loan approval and enough money to close. You’ve found your dream home on the other side of town, and gotten an offer accepted! In the meantime you’ve just put everything in storage for a few weeks in between closing the old house and the new one! The whole family is really excited, the new home is bigger than your old one, has a gorgeous kitchen, and a great view of the lake! The last 3 weeks have been hectic, you never imagined it would take so much time to move all that furniture out of the house, and clean everything and get it all ready to move in for the new folks! All that is finally done, and you’re just about to go over to the title company to sign all the papers formally transferring ownership. You feel your phone buzz in your pocket. It’s your agent, and she asks if you can talk now. You start feeling a knot in the pit of your stomach… You call your agent, and she starts off with, “I’m afraid I’ve got some bad news…. The buyers aren’t going to close….”
Unfortunately, this scenario has, and continues to happen. You’ve moved all your furniture out, you’re in escrow on a new house (and need to sell your old one first), and at the last minute the buyers can’t close. Maybe they got cold feet, maybe they experienced a job loss, maybe they made a bad decision and ran up their credit card and no longer qualify- really it could be anything. The fact of the matter is, you’re now in a pickle….what do you do?
There’s a lot of complicated aspects to even a seemingly simple real estate sale that many people don’t understand (yet another reason why it’s important to work with an experienced Curtis and Sons agent!) Earnest money is one of those. So what is that? Well, simply put, earnest money is a certain amount of money you put upfront with an offer to buy a home. If you end up closing on the home as planned, it gets applied to your purchase price. If you don’t close on the house (with a few time limited exceptions), then you (the buyer) lose that money.
Sounds pretty harsh, right? You might say, “I signed a contract, I’m promising to buy the house, why do I need to put up money?” Well, the unfortunate reality is that not all transactions end up working out. Sometimes it’s the buyer’s fault, sometimes its the lenders fault. However, it can rarely be the seller’s fault- when they sign a contract to sell a house they are legally obligated to go through with the sale for the agreed upon price, as long as the buyer is able to pay. If the seller refuses for some reason, the buyer can get a court order forcing the sale.
So, as you can see, once a sales contract is signed, the seller is basically stuck with what they agreed to (subject to some negotiations involving repairs after an inspection). However, the buyer has a lot of “outs”. On a typical sales contract with a mortgage the buyer has a period of time to get an inspection, and back out with no penalty if they don’t like the results. If the house doesn’t appraise for enough, or they end up not being able to get a loan (within agreed upon timelines), they can also back out with no penalty. This tilts the playing field even further in favor of the buyer.
It gets even more biased against the seller though- if it’s someone selling their personal residence to move, they are most likely going to need a professional moving company, and have to pay them up to $5630 (the national average for an interstate move according to US News and World Report), as well as schedule that a couple weeks in advance. So, our unfortunate seller could be at a week from closing, having laid out almost $6,000 to a moving company, gone through all sorts of stress, strain and time invested in the move, and then the buyer has a change of heart, something bad happens with their credit, etc, and they back out of the deal. What on earth does our seller do there??
Well, pardon the long buildup, but we finally get to the answer to our initial question. That’s where earnest money comes in. Hopefully the seller had a good agent, who collected a significant, earnest money deposit, that, according to law, as well as just plain common sense and ethics, should go to the seller. This hopefully compensates them for their moving expenses, stress and strain, as well as potentially missing out on a better offer or stronger buyer while their house was in escrow.
Earnest money does even more though. Having to pay some money upfront shows the seller that the buyer is serious, and intends to keep their word to the best of their ability. In any kind of competitive market, no seller will take an offer with no (or very low) earnest money seriously- it shows that the buyer is either unable or unwilling to “put their money where their mouth is”, and truly commit to buying the house.
So what to do if you don’t have very much money, but can qualify for a loan, and found a house you love? Well, that’s where working with an experienced agent can help-we can find creative solutions such as a “Possession After Closing” agreement. This is an agreement that simply allows the seller to stay in the house a little after closing, typically 1 or 2 weeks. This gives them enough time to move out, AFTER they’re sure that the deal has closed! Easy peasy, works for everyone!
So, apologies for the long post, but please, buyers and buyers’ agents, realize how important earnest (or other solutions like possession after closing) money is! It’s really the only way to make the transaction process fair to sellers. We hate when anyone loses their dream and a deal falls through, but we do have to protect sellers who can potentially end up in such a bad situation.