What is the actual purpose of Earnest Money?

Asked by James Avery, Edmond, OK Tue Nov 20, 2012

I mean...if it's easily refundable and the buyer can back out because they feel like it, and get their money back, then what is the point of Earnest money

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Annette Law…, Agent, Palm Harbor, FL
Tue Nov 20, 2012
That's a good question and I commend your understanding of the many protections in place to protect the buyer. The seller, by contrast, has few protections and is exposed to increased risk in additional to financial consequences when an attempted purchase fails.

It should be understood that the Earnest Check is not a piece of paper in a folder. IT WILL BE DEPOSITED BY THE ESCROW COMPANY. This small reality keeps 'jellybean' buyers from plastering home owners with purchase offers they have no intention of honoring.. Without this requirement, the consequences could be costly to homeowner, and no cost to a buyer.

A second aspect to the Earnest Money is a demonstration of your ABILITY to buy. A buyer needing 3% assistance from the seller, minimal down and NO Earnest Money will likely be incapable of adjusting to other bids or the predictable low appraisal.

There is a minor inconvenience in getting the money back but as you point out, not much
Add it up and this buyer could be a very weak buyer.

However, as you pointed out, a no risk, robust Earnest Money can tip the scales favorably in a buyers direction. It boils down to 'Do you want to sabotage your purchase offer?" Being stingy with 'no risk money, is not a beneficial start. Be acutely aware of what Alan advised...don't bet all your eggs on "NO RISK" Know what you are signing.

Best of success to you
1 vote
Alan May, Agent, Evanston, IL
Tue Nov 20, 2012
the concept behind earnest money is to show the seller that you're serious (earnest).

it's not easily refundable, and the buyer cannot back out "just because they feel like it"... they can get their earnest money back strictly within the confines of the purchase agreement. If they abide by the rules of the contract, then yes, there are several ways to get their earnest money back.
1 vote
Mack McCoy, Agent, Seattle, WA
Tue Nov 20, 2012
Well, james - it's not, and they can't, and that's the point.

Earnest Money is a provision to compensate the seller in the case of a buyer's default. It is not required by statute, but it is customary and nearly universal in the US real estate market.
0 votes
Terri Vellios, Agent, Campbell, CA
Tue Nov 20, 2012
James, as a seller you would want to know that the buyer has some "teeth in the contract". I'm not familiar with Oklahoma Real Estate Law, but in California our contract also has a "Liquidated Damage Clause". That is in the event the buyer fails to perform it is a limit on the buyer loss of what they actually deposited into escrow. This is 3% maximum here and our contracts the buyer usually puts up 3% as earnest money.

The earnest money also has a mental capacity to keep the buyer moving in the right direction and timely for they risk loosing that money. It also gives the seller peace of mind that the buyer won't tie up the property.

In order for a contract to be valid it has to have, Offer, Acceptance, Delivery and Consideration. The earnest money is consideration. Read the contract and have your agent/attorney explain it to you if necessary so that you know what your rights as a seller are before you engage in a contract.

Have an amazing day!
Web Reference:  http://www.terrivellios.com
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