Home Selling in Chicago>Question Details

Russ, Home Buyer in 60613

Earnest Money Disposition upon buyer default

Asked by Russ, 60613 Thu Sep 20, 2007

Hi all and thanks for all the helpful information I've read on this site so far.

On to my question, I am a first time home seller and now have an offer for my property. I'm not expecting any issues, but the topic of Earnest money came up if the buyer unexpectedly backs out. In this case, my RE agent informed me that upon agreement of release by both parties, the money would first go to the listing agent fees and then to me.

Well, that would mean I'd never get anything if a buyer backed out because the listing agent would have the whole earnest amount. Is this standard as this doesn't sound right to me... I am at loss here by having my house off the market and we have already turned down other showing because we're under contract, etc.

Thanks and I'm in Chicago, IL (Cook County)

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17
Hi Russ. I read all the previous answers and I want to thank you for asking the question as it allowed me to learn something new about how real estate is practiced in another part of this country.

Now to your question. It's really unfortunate that this issue about the deposit money did not come up when your agent went over all the terms of the listing agreement with you. It would seem to be an important point to discuss. While I gather from some of the other answers that paying the listing agent first seems to be one of the options, I would suggest to you to take a look at your listing agreement to make sure that this option is the one that was made part of your listing agreement.

I am also not clear why the agent would get paid at all just because the buyer backed out without good cause. I would think that the property would just go back on the market until the end of the listing agreement as falling out of contract normally does not automatically terminate the listing agreement.

I don't think you should worry too much about the buyer backing out as the buyer does not want to lose the deposit money either. In my years of real estate practice, I have never had a buyer lose his/her deposit and I would venture to say that it happens relatively rarely.

In the event that the buyer should cancel the contract and trigger the deposit forfeiture clause, I would definitely suggest that you negotiate a reduced commission in the amount that the agent received from the deposit money. Otherwise, the agent could earn two commissions for selling one property which would not be equitable at all in my opinion. Hopefully, this issue will never come up and I am sure when you sell your next property that you'll carefully read the listing agreement before signing it. Life is fully of lessons to be learned.
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1 vote Thank Flag Link Fri Sep 21, 2007
Ute Ferdig -…, Real Estate Pro in Newcastle, CA
MVP'08
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Sounds like your agent is either an old-timer or in an area where such a practice is still prevolent. I never expect a portion of the earnest money in the case of a buyer default, but it is not without precedence. The agent is out plenty of advertising expense and countless hours, so the buyer is effectively leaving him in the lurch, too. I personally prefer to get paid only when I successfully complete the job, but I don't begrudge an agent who seeks such protection. The thing that I don't like about this particular clause is that the agent is made whole before you are. I can see a portion of earnest money being reserved for the agent, but for the listing agent to be made whole before you see one penny sounds a bit draconian to me. The matter of fundamental fairness aside, where is the incentive for the agent to fight to keep the deal together? If the lister stands to earn a hefty fee even after the deal goes south ... and get paid again when you find a new buyer ... sounds like a whole new way to double-dip! And not a good one. Like I said, the concept is not unheard of, but I don't like the structuring of the split in this case.
1 vote Thank Flag Link Thu Sep 20, 2007
Russ, I'm alarmed by this. I just read my former listing agreement and it says in the Commission Earned section, "...earned at such time as a sales or exchange contract is executed and, except for Articles of Agreement for Deed, when all contingencies are met, or an option has been exercised or upon presenting to the Seller an offer meeting all terms of this Agreement executed by a ready, willing and able buyer." and basically paid at closing or settlement. "IF SELLER defaults..." you pay commission.

This seems normal to me and what I learned in a NC real estate class. For example, if you get cold feet "default" and decide not to sell after a contract has been completed, you still owe the agent the commission even if you didn't go to closing.

What doesn't seem normal to me is the Earnest Money section: "...closing, settlement, or Buyer's default, earnest money shall be applied first to the payment of ANY EXPENSE incurred by x on seller's behalf and second to commission and fee."
I'm hoping that it means if you ordered a title search or something and your agency paid them, you would have to reimburse them and not that you have to pay for all the advertising. I'm pretty sure it is not saying here that you own the commission if the buyer defaults.

Agents, can you clarify for us?

As for not showing, it depends on where in the contract period you are. If there are still contingencies, you should still show the property for a back up offer. You just have to let them know there is a contract and then they usually don't want to see it.

Ruth
1 vote Thank Flag Link Thu Sep 20, 2007
Ruthless, Other/Just Looking in 60558
MVP'08
Read your listing agreement. We sell businesses, and in our agreements, forfeited earnest money is split 50/50 with the seller.
0 votes Thank Flag Link Sat Jun 5, 2010
Russ -
You need to go back to your origional paperwork and see exactly what you signed. You should have signed a standard listing agreement used by your state or local real estate board. If that is the case the earnest money section should clearly define the disposition of earnest money. In most markets that would be money going back to the seller or buyer. In Missouri on a standard contract it would ALWAYS go back to the seller or buyer. If you don't get the answer you want you can contact an attorney but I wouldn't worry unless the contract falls through as the earnest money will then follow proper channels and come to you.
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0 votes Thank Flag Link Tue Oct 2, 2007
The financing extension is just par for course. Thanks for coming back and posting. I was thinking about you when we (the Trulian forum) got into the fact that California transactions don't typically involve attorneys. I know my IL real estate attorney is great and worth so much more than what little I pay him. My Michigan real estate attorney charges per minute for emails and reading messages from the receptionist saying to return my call and then never returns my call or emails.

You don't have to ask question to learn here. Just read through other's questions that you haven't even thought of yet. That's what you did for me - asked a question I hadn't thought of.

Thank you,
Ruth
Web Reference: http://www.Oak-Park-IL.com
0 votes Thank Flag Link Mon Oct 1, 2007
Ruthless, Other/Just Looking in 60558
MVP'08
So true....So true....

I have learned a TON from this thread already and this is my first post!!

Thank you all so much.....what a great team of people working together.

Yes, I will be looking much more closely at the buying agreement (which we haven't signed yet, but have already started looking at properties) and have contacted my RE attorney to be prepared to review the buying contract if I have any queries. I guess I'll proactively ask my agent to bring up the buying agreement since he hasn't and he's already bringing me around to view properties. Actually...I have provided *every* property we have gone to view so far..he has been scheduling the appts for us to go. I must admit that once I get into something, I'm really in it and am likely much farther ahead than most of his clients, so he may not have had much time to react in terms of providing/suggesting properties that I haven't already brought to him.

We're going to look at two more properties tomorrow (still not under a buying contract). I wouldn't purposely take advantage of someone...but it seems he would've wanted this document signed for us to move forward. From my side....I'm curious about the verbiage/clauses.

On the selling end, which I expect to get to again in the next couple years, I'll be weary of these clauses. I just got a letter from the seller's attorney today that the seller (supposedly preapproved) doesn't have the financing all set and needs a two week extension............ Ugh
0 votes Thank Flag Link Mon Oct 1, 2007
GEEZ! I feel like I was hoodwinked (once again) by the person who was (so called) representing me. Thank you Russ for bringing up this matter and to Patti for providing the wording. Luckily I didn't have this situation arise. Even though Patti is NOT lecturing Russ, I think Russ should be congratulated for addressing this even though the situation hasn't actually arose for him either.

Myself (a former NC agent), my partner (licensed IL real estate agent until this year) and our REALTORS® went through the listing agreement in detail. As I said in my earlier post, I understood when (or if) I had to pay the commission. We did negotiate several terms in our listing agreement. We apparently didn't catch that we didn't know what the earnest money clause could lead to. We had crossed out the $275 admin fee for closing, cancellation or expiration and thought that the "any" expense incurred in the EM section was referring to the terms of the Commission section. I'll be taking this to my attorney for interpretation on whether the agent could apply earnest money towards commission if the buyer defaults since the commission is stated to be earned only if the seller defaults. (I will also be reporting my former agents to the BBB because I had asked to get the listing agreement in advance and they kept saying, didn't I send that to you? We signed at the house and didn't have a photocopiers and again they delayed getting it to me. It was 2 weeks before I received a copy of the listing agreement and what was entered into the MLS, which had errors.)

Russ, yes there are multiple 'standard' listing contracts. I signed the 'standard' listing contract for the company that I chose to do business with. Patti's 'standard' listing contract is IL Association of Realtors. I would guess that different local boards would also have their own version of a 'standard' listing contract.

The lesson I learned last year when making offers on several properties was that agents were using the standard IL Assoc of Realtor Offer to Purchase Contract but different dated versions. The home inspection clause had changed dramatically!

Paul, you are completely right. What incentive does the agent have to fight to keep the deal together?
And Trulia - this is why I enjoy getting the perspective from people outside my area. If someone moves from one state to another, they need to understand what differences that they might encounter.

I guess the new advice is to have your attorney review the listing agreement before you sign it.
Ruth

P.S. I think I need to go to law school.
Web Reference: http://www.oak-park-il.com
0 votes Thank Flag Link Fri Sep 21, 2007
Ruthless, Other/Just Looking in 60558
MVP'08
Hi Russ:

Yes, each MLS board has its own listing agreement.

Realtors access them through their boards or brokers; they are not available to the public.

Do you have a copy of yours? If you do not, ask your agent for a copy of the one you signed when you listed your home with him.

Good luck!
0 votes Thank Flag Link Fri Sep 21, 2007
Patti Pereyra, Real Estate Pro in Chicago, IL
MVP'08
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So, are there multiple 'standard' listing contracts for any given area? Is there an online resource you know of where I can view them and print them out?
0 votes Thank Flag Link Fri Sep 21, 2007
Hi Russ,

Go back and look at your listing agreement. If your Realtor used a Illinois Association of Realtors listing agreement, there is a section that specifically addresses the disbursement of earnest money in the case of default (copied below for you).

Verbatim, from Illinois Association of Realtors Listing Agreement:

(a) due to fault of the Seller, the earnest money shall be returned to the buyer.
[AS TO (b) THROUGH (d) BELOW, THE PARTIES SHOULD CHECK THE ONE PARAGRAPH WHICH APPLIES].
___ (b) DUE TO FAULT OF THE BUYER, THE EARNEST MONEY SHALL FIRST GO TOWARD PAYING THE COMMISSION BROKER
WOULD HAVE EARNED IN THE SALE, AND THE BALANCE, IF ANY, SHALL GO TO SELLER.
___ (c) DUE TO FAULT OF THE BUYER, THE EARNEST MONEY SHALL BE DISTRIBUTED TO THE SELLER, LESS ANY
COSTS OF ADVERTISING OR REASONABLE EXPENSES INCURRED BY BROKER.
___ (d) due to fault of the buyer, the earnest money shall be distributed to the Seller.

As you can see, per this listing agreement, this is a negotiable method of disbursement, and should have been discussed between you and your Realtor prior to your signing the listing agreement.

Now, there are other types of listing agreements, and I don't know which one your Realtor used. For example, the North Shore-Barrington Association of Realtors (for north suburban brokers) listing agreement DOES state that in the event of default by the buyer, the broker is due commission first with any remaining funds due to the seller, AND that, should the earnest money funds in escrow not be sufficient to cover said fees, that the remaining commission due is the responsibility of the seller!

You will really have to refer to your agreement to know what will happen in your case.

And it should also be a lesson to all consumers (not lecturing you, Russ, I swear!) to actually read the listing agreement carefully, and to not be afraid to ask your Realtor to negotiate certain terms.

Finally, regardless of which option was selected on your listing agreement, the standard Multi-Board Residential Real Esate Contract in Illinois specifies that prior to any disbursement of earnest money funds due to buyer OR seller default, both parties must sign a release agreement directing that the funds be released from escrow.

Good luck to you on your house sale; wishing you smooooth sailin'!
0 votes Thank Flag Link Fri Sep 21, 2007
Patti Pereyra, Real Estate Pro in Chicago, IL
MVP'08
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Again... I thank you all so much for your very insightful and practical comments.

I do have a real estate attorney (which was actually referred by him) and I'm going to ask them to review this clause and comment as compared to the many other deals they work with.
0 votes Thank Flag Link Fri Sep 21, 2007
Either counter-out this clause or negotiate a better deal prior to the signing of the listing or sales contract. Here in California I've never heard of an agent getting commision because of a default by either party. One can ask but they are on shaky ground. It's just tough enough getting all parties to agree to release the earnest money as it is. Since your offer is now accepted and you are in your due diligence phase you can always accept "back-up"offers subject to the cancellation of the previous deal. Hopefully your greedy agent is asking for a substantial deposit increase once all contingencies are removed. In his case this would be giving him a bonus if the deal defaults!! I think I'd consult a real estate attorney and verify this agents claims. If this deal doesn't go through--fire him and next time clarify, in writing, all disbursements of earnest money should a default occur.
0 votes Thank Flag Link Thu Sep 20, 2007
Russ,

Let us know how you make out after your conversation I would love to know.

Again the very best of luck,
Linda J Sears
0 votes Thank Flag Link Thu Sep 20, 2007
Thank you both for your comments and input.

Where this was stated was on the original Listing contract and my agent indicated that it's always been that way for the 15yrs he's been in RE. As noted, I can (and should) discuss with him as I am planning a longer term business relationship with him as I'm starting to invest in RE. So, there will be other 'sales' down the road.

On the other point... I agree that the house shouldn't be taken off the market until there is a clean contract. Another important point for us to discuss.

Thanks again for your comments!
0 votes Thank Flag Link Thu Sep 20, 2007
Russ,

It all depends on the listing contract that you signed. It is customary that the earnest money deposit, upon release, gets distributed to the seller and possibly the realtor. In the listing contracts in Florida is it normal to have it stated that if there is a default up to 50% of the earnest money will go to the listing broker. But like everything else it is negotiable in that it states UP TO. What I have done in the past ( I have had to deals fall through in which the buyers for whatever reason backed out) is charge nothing to the seller in return they relist their home with me. Both cases worked out and I sold ther home again and all was well. This is a discussion you need to have with the broker in the office where you listed only after you have completely read your listing agreement. Hopefully your agent got a substantial deposit. It is so important to protect the seller. My last thought is why are you not showing you home and offering buyers to make back up offers. That way if your buyer for whatever reason defaults you have a second contract ready to roll. The only time I take a house off the market is if there is a totally clean contract with no contingencies and closing within 30 days.

I would suggest a heart to heart discussion with the broker of the office.

Best of luck,
Linda J Sears
0 votes Thank Flag Link Thu Sep 20, 2007
Hi Russ,
I've never heard of that before. The earnest money belongs to the seller or the buyer. The listing agent gets paid when the sale of the home closes. If the sale does not close, the listing agent doesn't get paid!
Did you sign a separate document saying you would reimburse your agent for his/her expenses?
0 votes Thank Flag Link Thu Sep 20, 2007
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