I am getting ready to make an offer on a home in the valley, and I am uncertain how much earnest money to put down. My broker has suggested that a larger amount would make my offer look stronger, but I am reluctant to put a lot of money “at risk” in case things don’t go well, and the seller attempts to keep my deposit. What do you recommend?
Dear Concerned Buyer,
I think the best way to find the answer is to look at the earnest money subject from both sides.
If you are the seller and you are getting an offer with a very small earnest money deposit, you might think the buyer does not have very much money, or is not very committed to this offer.
If you, the buyer, are very concerned with a sizable earnest money amount, you can help mitigate this concern by offering a small earnest money amount to start with and then tender additional money after certain contingencies are met.
This may make you and the seller more confident. Or you might make a larger deposit and add a clause in the contract that could speed the return of your money in the event there would be a dispute (consult your attorney for wording).
This brings us to the buyer’s concern with the risk your money is under. First of all, you have nine (or more, depending on the property) “objection deadlines” from nine different phases of the contract. If any of these are not satisfactory to you, you can write a termination letter on or before the designated objection date in the contract and be entitled to having your earnest money returned. Remember, these are put in the contract to protect the buyer during their “investigation” period, but they are not to be taken casually when you are making an offer and tying up the seller’s property. Under Paragraph 29 of the Colorado Real Estate Commission Residential contract, you are obligated “to act in good faith including, but not limited to, exercising the rights and obligations set forth in the provisions.” It goes on to list the nine-plus contingency sections. Therefore, for example, if you have a loan approval contingency, you must earnestly and honestly attempt to secure a loan. If you would neglect to apply for a loan that could be considered “not in good faith,” and your earnest money might be at risk. You need to discuss each of these contingencies with your broker and/or attorney, so that you understand them prior to signing the contract.
If you do choose to terminate the contract in a timely fashion due to any of the contingencies not being met to your satisfaction, the title company holding the money will ask for a release signed by both the buyer and seller.
In nearly all cases I have had over the 28 years I have been selling real estate in the Valley, the earnest money is returned to the buyer, if the buyer actually had the legal right to terminate.
In the event there is a dispute over who deserves the money, the title company has three options, spelled out in Paragraph 24 of your contract. If you are still concerned about the risk after reviewing the contract with your broker, you should contact an attorney and/or visit with the title company to increase your comfort level. And don’t forget, the sellers can always counter if they think the earnest money is too low. Good luck with your offer!
Joan Harned is an owner and broker for Keller Williams Mountain Properties and heads up Team Black Bear, her own real estate team. Harned has been selling real estate in Eagle County for 27 years, is a past chairman of the Vail Board of Realtors, past Realtor of the Year, past director on the Great Outdoors Colorado Board and a member of the Luxury and Land Institutes. Contact Harned with your real estate questions at firstname.lastname@example.org, 970-337-7777 or www.skiandteehomes.com.