Earnest Money

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"Earnest money" is nothing more than a deposit of part payment of the purchase price on a sale to be consummated in the future. In the context of a real estate transaction, several courts have defined earnest money as a "comparatively small sum of money paid down as an assurance that the party making the offer is acting in earnest and good faith and that " . . . if his being in earnest and good faith fails, it will be forfeited."
We can say that earnest money is the money you give to the seller (or the seller's agent) to show your good faith when making an offer to purchase the seller's property.

1. Earnest money is evidence of "good faith willingness to purchase"
1. A potential purchaser antes ups something of value and risks giving it up
if there is not a genuine effort to fulfill the promise made in an agreement
to purchase real estate
2. Purchaser is offering/risking something of value for seller's willingness to
exclusively reserve, for some time period, seller's property for purchase
3. Earnest money can be a significantly convincing element of negotiations
between sincere buyers and sellers that doesn't have to "cost" the buyer.

2. Earnest money is a negotiable element of a purchase agreement. The
contractual language of the purchase agreement should spell out the details
for handling all aspects of earnest money
1. There is no set amount, except what a purchaser and seller are willing to
mutually accept. Many factors can influence what is mutually acceptable:
market conditions (buyer or seller's market), which party is more
motivated availability of funds and immediacy of closing date.
2. Detail, unambiguous contract language should include: Amount and form
of earnest money i.e. check, cash etc.
3. Triggering event for "delivering" or providing earnest money i.e. with
writing the offer to purchase, with acceptance%u2026
4. 4.Triggering event for depositing i.e. acceptance
5. Who will "hold" the earnest money i.e. buyers broker, builder, sellers
broker

3. Real estate brokers are held to strict and specific guidelines set down by
law and regulations when handling earnest money.
1. Funds MUST be places in a bank "trust account " or "special account ",
that is non-interest bearing and separated from brokers operating funds
2. Earnest money must be deposited ASAP in accordance with the terms of
the purchase agreement
3. Earnest money may ONLY be release by the broker :

If there is a closing

By court order

By mutual agreement between buyers & sellers

4. Practical aspects of real estate broker receiving earnest money
deposits include:
1. Providing a dated receipt detailing the amount and form of earnest money
2. Collection of earnest money as per terms of the agreement
3. The procedure, spelled out in the purchase agreement, for "holding"
buyers check or cash until the depositing event

5. Practical aspects of broker releasing earnest money at a closing:
1. Funds must have arrived in trust account to be releases
2. Funds have to be release to the provider of the funds, which may not
actually be the buyers.

6. Mutual release in lieu of a closing
1. The broker holding the earnest money MUST have a release form signed
by all parties which details who is to receive what portion of the earnest
money BEFORE any money can be releases
2. Buyers and sellers can agree, as part of the purchase agreement, to a
procedure to be followed by the broker in the event a closing does not
occur. Usually each party retains some veto authority to stop a release
to the other party
3. Until such time as a release is properly completed or release procedure
able to be completed the earnest money will remain in the broker's trust
account
4. Without a closing and without a mutual release the remaining option for
either party is to pursue a court order, usually via small claims action.

7. Release by broker as per court order
1. The broker must follow any duly authorized court order in releasing
earnest money
2. Purchase agreements typically spell out under what circumstance which
party would be entitled to the earnest money.
3. Each party would have the burden of demonstrating to a judge how they
fulfilled their terms of the agreements and/or how the other party did not.
4. The broker, despite all seemingly obvious evidence, MAY NEVER
determine who is or is not entitled to the earnest money.

Here are the links to pages discussing other important earnest money questions:

Earnest Money Agreement

Earnest Money Law

Earnest Money Dispute

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