Question Details

Scott, Both Buyer and Seller in Saint Louis, MO

Why Earnest Money At All?

Asked by Scott, Saint Louis, MO Wed Jan 16, 2008

Perhaps someone can answer this question.... Why should buyers, particularly in a Buyer's Market, pay earnest money at all? My rule has always been... Always make sure you are getting something for your money.
So what does the the Buyer get for their earnest money? The Buyer is the one who incurs the cost of inspections and undergoes similar labors in performance of the buy/sell process. The seller gets a list of defects( Which is valuable information). Then the seller can simply walk-away by refusing to make corrections. Yes the Buyer gets their earnest money back, but so what?

What protects the Buyer from such a scenario? And back to my original question... What does a Buyer get for their earnest money?

Help the community by answering this question:


These are very useful answers as they help me see a little more clearly what is going. Thank you.

So the Seller takes the house off the market because there is a contract on the house. At this point, the Buyer and the Seller both have an obligation under law to perform to the terms of the contract. If either refuses performance for anything other than negotiated reasons, the one who 'walks' is liable for failure to perform to the stipulations of the contract. This is the incentive to for both parties to negotiate and perform in good faith. This is also the incentive for the Seller to pull the house from the market.

If the Earnest Money limits the liability of the Buyer for failure to perform, then this is 'value' for the Buyer. In which case, it makes sense for the Buyer to provide earnest money as it is effectively insurance.

Is this the case with Earnest Money? Does the fronting of Earnest Money remove the Seller's right to claim any damages, beyond the Earnest Money, if the buyer fails to perform to the terms of the contract?

Thanks again.
1 vote Thank Flag Link Thu Jan 17, 2008
You get to hold the seller to the contract. That means you can theoretically force him to sell you the property at the price and terms you both agreed to, even if a better offer comes along after you have tied him into contract with you.

If no repairs are needed, or if the seller completes the requested repair, and you are able to close escrow, your earnest money changes its name to down payment money.

If the seller refuses to make the repairs, the buyer gets his deposit back. - If your contract specifically states that the seller is required to make certain repairs (usually within a specific dollar limitation) , the seller would have been obligated to make those repairs, with no right of refusal unless the repair cost exceeded the amount allowed in the contract.

Look over that original contract - the one you wrote the offer on - did the offer specify the seller was obligated to make the repairs that are on your inspectors list? Or did you just add that later after you got the report.

Step into the sellers shoe for a minute. The seller is being asked to break your rule "Always make sure you are getting something for your money." If the seller does the repairs and the buyer does not increase the price then the seller is not getting something for his money. Of course the buyer could argue that closing the escrow at the previously agreed to nominal price ( but a lower net price for the seller ) in a buyers market is getting something for his money.
1 vote Thank Flag Link Wed Jan 16, 2008
Jim Walker, Real Estate Pro in Carmichael, CA
Hi Scott, it looks to me like you really have three questions here. The first - "Why do buyers need to make an earnest money deposit? " - the earnest money deposit is really a show of good faith. You are saying to the sellers - I am not here just wasting your time, I am willing to take a risk, and commit to you that I am a serious prospect for this transaction.

Remember that ESPECIALLY in a buyers market, a seller putting their home under agreement is a HUGE risk. When sellers make a commitment to a buyer, they are saying, we are taking our house off the market, we will not allow other showings so that we can show you we are serious about completing this transaction with you. If you walk after the inspection, or because you can't obtain financing, or because you wake up in the morning and realize you want to live in another state, they have to put the house back on the market, and the house may have lost value while the sellers were wasting time with you.

The second question "What does the buyer get for their earnest money?" You get two things - most importantly, you get the house locked off the market so other buyers can't get in there and purchase it out from under you. Secondly, you get the use of that money back - however it is negotiated in your contract - most of the time, it comes off the purchase price of the home. Sometimes,, with cash strapped First Time Buyers, it can be negotiated that it will be returned to them. So in most cases, it is still your money. The only time you would get nothing for it is if you defaulted - or in other words, walked away from the contract without a negotiated reason, or after a key date had expired. Then the sellers get to keep it because it is likely their house lost value while you wasted their time.

Your third question, "What protects the buyers from the seller walking away from the inspection repair request with a free list of defects?" There are really two parts to this as well - first, you have to have some faith that this seller really wants to sell. Otherwise, why are they going to the trouble of meeting with an agent, completing the listing paperwork, cleaning their house for showings, etc...Why would the seller go through all this if they aren't serious? The second part is that once the sellers have been notified of a defect, it is not very smart of them to walk away from a committed buyer. You would be asking them to fix something that it is likely they will have to fix for any buyer who comes along. If you tell them that there is a defect with the roof, they walk away from you and sell to someone else, they should really tell these new buyers that there may be an issue with the roof. If they don't, they run the risk of being held liable for failure to disclose a material defect. When they do, guess what - the new buyers will want a new roof - why not just negotiate with you in the first place. The only reason sellers will sometimes walk away from a buyer with repair requests is if there is a long list - or a request which is in some way outrageous. In that case, the sellers must be convinced that they have a reason to take the risk of re-entering the market.

Lots of good questions here, I hope my answers are useful and that you have great transactions! Stacey
1 vote Thank Flag Link Wed Jan 16, 2008

Let me respectfully submit a response to your question. The type of market (BUYER OR SELLER) shouldn't have anything to do with earnest money. Let me share with you some personal experiences.

In the homeowners' eyes, depositing an earnest money check with a real estate company shows a form of good faith. If Scott is willing to put some money in the deal, he must be serious about buying my home. I'll take my home off the market and reserve it for Scott (giving you something for your money).

Trust me....If you ever had someone beat you to something (ie. tickets to an event), it can be disappointing. With earnest money, you don't have to worry about losing your dream home.

Now....The home is OFF THE MARKET. Scott, this point is critical. In some markets.....if your home is UNDER CONTRACT, MLS requires the home to be placed in a CONTINGENT or PENDING status. When searching for homes in my market, most agents will not even consider a CONTINGENT or PENDING home in their search. Unless, they cannot find another home in the ACTIVE listings.

Yes. If the contract does not get to the closing table, the seller can "walk-away". However, they might have lost another buyer because their home was not "ON THE MARKET". Time does equate into the money spent for inspections, etc.

Unfortunately, there isn't anything that protects you from a seller not fixing defects. However, IF THE SELLER WANTS TO SELL, they will do the "reasonable" repairs. This is where a good listing agent earns their money. The listing agent should have encouraged the seller to make repairs BEFORE putting the home on the market.

Scott...get yourself and great Accredited Buyer Representative (I can help you find a good one) and only deal with listings that are represented by reputable real estate companies.

I hope this helps! Please feel free to email me with your follow-up.

Good Luck in your Real Estate Search!


David A. Patterson, Broker CRS ABR
Russell & Jeffcoat Realtors, Inc.
5219 N. Trenholm Road
Columbia, SC 29206
(803) 960-5231

Visit My Blog - Your Comments are Welcomed

Great service begins with a clear purpose!
1 vote Thank Flag Link Wed Jan 16, 2008

This is where most agents won't be able to give you a black and white answer. It depends upon the terms of the Contract of Sale. ALL CONTRACTS ARE NOT THE SAME. From my personal experience, there is a DEFAULT clause in most contracts. If written properly, the clause allows for the ability to sue either party.

For example, IF THE SELLER has made all the repairs and have met all other terms of the contract, you can't say "I change my mind." The earnest money would be the least of your concerns. You could be sued for SPECIFIC PERFORMANCE. (NOTE: If your contract has a FINANCING or an APPRAISED VALUE contingency, these could be items that would allow for the return of your earnest money.)

This suing thing works two ways. If you (the buyer) have met all the terms of th contract, the seller just can't get all sad and say, "I don't want to leave. I have too many memories in this house." As the buyer, you could sue for specific performance. Of course, if the seller doesn't agree to do the repairs, then you would decide if you wanted to move forward with the transaction.'s the thing. How much is it going to cost you to hire an attorney and go through the whole process of suing for SPECIFIC PERFORMANCE. Some would say, IT'S THE PRINCIPLE OF THE THING.
ok....Others might say.....This isn't worth the headache.

In short, there are other remedies to DEFAULT. However, they must be specified in the contract. If you're uncomfortable with those terms, NEGOTIATE THEM.

That's just my $.02. Scott.....Those are great questions. That's why you need a true PROFESSIONAL to reprepresent you in this mind field known as "Purchasing Real Estate".

Good Luck,

David A. Patterson, Broker CRS ABR
Russell & Jeffcoat Realtors, Inc.
5219 N. Trenholm Road
Columbia, SC 29206
(803) 960-5231

Visit My Blog - Your Comments are Welcomed

Great service begins with a clear purpose!
0 votes Thank Flag Link Thu Jan 17, 2008
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