Real Estate Column: How much is enough earnest money?
Ryan Summerlin January 3, 2014
I just received an offer on a property I have listed for sale and I am concerned about the earnest money. First of all, the buyer has an “alternative earnest money deadline” date, saying they will provide the money in the future, not with the contract offer. Secondly, they have made the earnest money amount less than 2 percent of the purchase price, and I think that is too low. I have been told that the buyer can get their earnest money back for a lot of reasons, so not to worry about the amount. What do you think?
In answer to your first question, it is very common to use the “alternative earnest money deadline” with a date in the future for the buyer to provide the earnest money. This is done so no one has to put up, or hold on to, a large sum of money while the buyer and seller are still negotiating back and forth hoping to work out an acceptable contract that might never happen. I think the only important consideration here is to have the money be tendered within a few business days of mutual acceptance of a contract by the buyer and seller.
Secondly, the amount of the earnest money is an important factor in a contract, in my opinion. It is true that the buyer has eight to 10 ways they can object (in a timely fashion) and be released from the contract and have all of their earnest money returned. If, however, the contract is contingent upon the buyer getting a loan, and then the buyer does not go through all the steps necessary to apply for a loan, or they fail to object to any part of the contract on or before the specified date to object in the contract, their earnest money could be at risk. Also, Paragraph 29 of your Colorado Contract to Buy states that each party has an obligation “to act in good faith” and therefore must earnestly and diligently work towards the completion of the contract. This paragraph is, of course, subject to legal interpretation, but could be cause for the buyer’s earnest money return to be put at risk for various reasons.
You should also consider Paragraph 19 of your listing agreement called “forfeiture of payments” that states that in the event that the buyer does forfeit their money, that money is to be divided 50/50 between you and your listing broker, not to exceed the commission amount that could have been earned. Therefore, unless you have made other arrangements, you need to ask the buyer for twice the amount of earnest money that you plan on retaining.
Before making your final decision, if you have a good offer and the earnest money becomes the only sticking point, you can sometimes accept less money initially and then ask for additional earnest money once all the contingencies have passed. Your listing broker can advise you on how to do this. Good luck with your sale!
A copy of the Colorado listing contract can be seen at http://tinyurl.com/colisting and the sales contract can be seen at http://tinyurl.com/cocontract.
Joan Harned is an owner/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 Joan@TeamBlackBear.com, 970-337-7777 or www.SkiAndTeeHomes.com.