why does the broker cash the earnest money befor the closing?

Asked by Big D, 30093 Fri Oct 1, 2010

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Ruth and Per…, Agent, Los Gatos, CA
Fri Oct 19, 2012
BigD thanks for your question.

It is generally a requirement that one provides an Earnest deposit check to be held by Title or Cashed within 3 days by an Escrow Company.

It is part of the contract, and should be clearly spelled out.

In the event, you cannot perform, after having removed all contingencies, then a Buyer can
keep the deposit, as you failed to perform.

Real Estate Contracts are taken very seriously, as one is engaged in an Expensive Asset
purchase where a Seller may be selling to you, and has an Offer out on another property.

Good luck.

0 votes
Agree, and well said!
Flag Wed Jan 9, 2013
Mattfour1, Home Buyer, Norcross, GA
Fri Oct 19, 2012
I wrote an earnest check for $8000 the day after my contract was completed to buy the home. The check was taken to the seller's realty office that day. After 16 days, the check had no cleared my bank. I had called repeatedly because my mortgage broker needed a copy of the cleared check. The seller's realty company had "misplaced" the check and finally found it and deposited it after 18 days. Do I have recourse against them?
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Darrell Hess, Agent, Asheville, NC
Sun Oct 3, 2010
The broker does not really cash the earnest money before the closing. The deposit it into an escrow account. It has to be done within 5 days of the broker receiving the check and they must receive the check as soon as humanly possible from their real estate agent. As the other agents have mentioned it goes towards the purchase price of the home, closing costs, or a refund back towards the buyer at the closing table.

Hopefully you are working with an agent as a buyer. There is no reason not to as they 99% of the time get paid from the seller side and basically work for free for you. This would be a perfect question to ask your real estate agent, but if they could not answer this well sorry. I suppose hats off to Trulia in that case.
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Mark Lackey, Agent, Norcross, GA
Sat Oct 2, 2010
Besides the law, there are basic practicalities. The funds have to be proven to be there. The lender wants to see the check has been accepted by the bank it was drawn on, just like certified funds or wire funds are accepted at closing.

Mark Lackey
Atlanta Housing Source at
Solid Source Realty, Inc.
Associate Broker

Home Buyers & Sellers - http://www.AtlantaHousingSource.com
Property Management – http://www.SolidSourcePM.com
0 votes
Desari Jabbar, Agent, Stone Mountain, GA
Sat Oct 2, 2010
Short answer. In any contract there is an offer and consideration. Your offer is your purchase agreement and the consideration is the earnest money deposit. If your check is not honored at your bank, then there isn't a valid contract. So, the broker has to cash the earnest money to make certain the funds are good.

Best of luck to you!
Web Reference:  http://www.DesariJabbar.com
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Alex Rodrigu…, Agent,
Sat Oct 2, 2010
because it is written on the contract.
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Hank Miller, Agent, Alpharetta, GA
Sat Oct 2, 2010
I think it's been sufficiently pounded - deposit is required by law and it shows "good faith" and a commitment on your part to close the deal. In effect, you are posting that as your "skin" in the deal. Also, that deposit is recognized by the closing attorney and mortgage company at closing.
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Stephanie Mc…, Agent, Canton, GA
Sat Oct 2, 2010
Dear Big D. It's the state law. And, what would be the point of taking earnest money if it is not going to be held during escrow?
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Michael Hamm…, Agent, Suwanee, GA
Sat Oct 2, 2010
Several reasons, Big D. To show the buyer is absolutely earnest about going through with the deal if it is accepted by the seller. Also to ensure the paper is good. Last, it is very difficult to prove monetary harm in a failed transaction, so it usually serves as "liquidated damages" in that scenario. Hope this helps.

Michael Hammond

0 votes
Mitch Falkin, Agent, Alpharetta, GA
Sat Oct 2, 2010
BIg D,

In the standard Georgia Association of Realtors contract (see the last paragraph of my answer if you aren't working with a Broker), you typically give the earnest money to the Broker at the time you sign the offer, and then the Broker is obligated to deposit the money in their escrow account within 5 banking days of the Binding Agreement Date (when the offer is agreed to by all parties and becomes a Binding Agreement, commonly referred to as a "Contract"). In my opinion, their are two main purposes of the earnest money: first, it shows that you (the buyer) are serious about buying a property and you are willing to put some money at risk in the process; and second, it is typically the amount that you (the buyer) will lose if you don't go through with the contract as it is written (known as a default on the contract). So the money has to be deposited at the beginning of the transaction in order for it to show you are serious, and to be available to the seller if you default or don't close according to the terms of the contract.

When the transaction is completed at closing, that earnest money is credited back to you on the closing statement (in effect it becomes a part of your down payment that you have already paid prior to closing), so you don't have to pay it again. Techncally speaking, at most closings you will get a credit for the earnest money, and the Broker holding the earnest money will keep it as part of the commission they are due. The rest of the commission is given to them at closing (typically from the seller).

If the earnest money wasn't cashed before closing, a couple of problems could arise. First, if the transaction goes along fine and gets to a closing, the buyer would have to bring additional funds to close (since the earnest money was never cashed and made "good"). And second, if the transaction DOESN'T close because the buyer defaulted, the seller would have a very difficult task of pursuing the buyer legally to get compensated for the buyer's non-performance.

One other thing: if there is no Broker involved in the transaction, I would be very hesitant to give the earnest money directly to the seller - I would recommend getting the law firm you are going to use to close the transaction to hold the money in THEIR escrow account, so it is held by a third party. Sorry for the long-winded answer, but it's a very good basic question that brings up a lot of issues. Good luck with your transaction, and if you need a local Realtor, please think of me.

Mitch Falkin, Associate Broker
RE/MAX Greater Atlanta
Web Reference:  http://www.MoveWithMitch.com
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Morgan Hill,…, , Sandy Springs, GA
Fri Oct 1, 2010
It's a law. As agents we have to have the earnest money to our broker with the appropriate paper work within 24 hours of an accepted, fully executed agreement. For brokers, they have about a week to review the paper work and actually have the money deposited in their escrow account. An escrow account that must be registered with the real estate commission.
Web Reference:  http://www.morgansteam.com/
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Kevin Olson,…, Agent, Colorado Springs, CO
Fri Oct 1, 2010
The broker has to do what rules state, and in most cases when the broker is where the earnest money goes, it has to be deposited into a trust account until closing. These are some of the most regulated rules (dealing with earnest money), and any deviation can result in large fines. By depositing the earnest money check, it verifies proof of funds (if the earnest money check bounces that isn't a good sign) and demonstrates good faith by the buyer.

Depending on each situation, the money might go towards the down payment, closing costs, or even go back to the buyer at closing.
Web Reference:  http://www.liveinsprings.com
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