Earnest Money Deposit's - Are They The Norm Everywhere?

By
Real Estate Agent with Long & Foster Real Estate Companies- Fredericksburg/Spotsylvania

I recently got a call from an agent who indicated that she was about to present an offer on one of my properties. We had quite a nice conversation, and we reviewed, while on the phone, what I assumed were most or all of the pertinent details of the offer.

Shortly thereafter, I got the offer via fax. As I reviewed it, I was a little surprised when I got to the part about the "Earnest Money Deposit." It was blank. Ok - oversight. No big deal. I call the agent, and get the explanation. The client, who is approved for 100% financing, feels that no earnest money deposit is necessary. I explained to the agent that while I found this a little unusual, I would of course be presenting the offer to the seller immediately.

Ok, I understand. Clients think stuff. And technically, earnest money is not "required.". In my area, it is just normally done.

How about in other areas? Is an Earnest Money Deposit" the expected norm?

 

Kevin McGrath

The Wallace & McGrath Team 

Coldwell Banker Elite - Fredericksburg

"Selling Homes In The Fredericksburg Virginia Area"

www.fredva.com

 

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Rainmaker
25,996
Matthew Rathbun
Coldwell Banker Elite - Fredericksburg, VA
ABR/M, CRB, CRS, SRS, ePRO, SFR, GRI

I would most certainly make sure that I documented with my client that I they should consult an attorney before accepting such offer.  I would premise it with the fact that there is no recourse to them for damages if there is not a ratified contract and that without valuable consideration, there is no ratified contract.  You are not only ethically, but legally bound to present all expressed offers (Virginia law only requires you to present written offers - but the COE requires us to present verbal offers, as well).  

And yes, contract law overrules printed contract, in this case.  The laws says that in order to have a contract you must have valuable consideration - so, you have no "printed contract" unless it meets the defination of a "contract".  Even a meeting of the minds, must be done with the context of the law.  Another defense of a contract is it's illegaility.  If it's creation is in violation of the laws, than so is the agreement and the document. 

I think agents get too careless when they start explaining away the laws because it doesn't fit into our understanding of the real world.  I feel very strongly that no single deal is worth going to court over or loosing my license. 

The seller can sell their home, that's not the issue.   The issue is do they have recourse should the buyer default and the answer is no.  The courts are not going to consider the contract binding with valuable consideration.  And when consideration can be as little as $10, why would anyone not produce something?  Heck, put their car in escrow or at the very, very least a promissary note.

Dec 31, 2007 11:15 AM #18
Rainmaker
129,139
Kevin McGrath
Long & Foster Real Estate Companies- Fredericksburg/Spotsylvania - Fredericksburg, VA
Long & Foster Real Estate Companies

Elizabeth - I like your style. Next time my wife and I go to SF I'll look you up.

Matt - don't think I am disagreeing with you. I just love the debate; I think it is the best educational tool out there. See you later this week. 

Dec 31, 2007 04:45 PM #19
Rainmaker
293,641
Mark Horan
Resident Team Realty, LLC & Toni's Property Management LLC - Saint Cloud, FL
"The Resident Chef" - Resident Team Realty LLC &
Kevin- The earnest deposit is usually about 1% of the contract price. When I am working with buyers I try and get as much as I can. Keeping them from walking away from a deal is my motivation. If I'm representing the seller I advise them that 1% is usually prudent.
Jan 01, 2008 02:35 AM #20
Rainmaker
25,996
Matthew Rathbun
Coldwell Banker Elite - Fredericksburg, VA
ABR/M, CRB, CRS, SRS, ePRO, SFR, GRI

Ok, so not to necessarily back-track as much as clarify.  I was re-reading my answers to your questions, and wanted to make sure you understood the premise of my answer.  Escrow can come in many ways.  Valuable consideration can be the mere promises that are agreed upon, as they have some value.  However, I think that without the Seller understanding that the escrow is the promise and that the “value” in the consideration is worth no more than the promise made.  (Which in my opinion and probably many other’s has no value at all).  Again, my premise is that there always must be some valuable consideration, but everyone needs to agree on it’s worth. 

 
Jan 01, 2008 06:55 PM #21
Rainmaker
104,210
Josette Skilling
Keller Williams Capital Properties - Bethesda, MD
This is an interesting discussion to follow.  Never occurred to me not to have earnest money...
Jan 02, 2008 09:46 AM #22
Rainmaker
129,139
Kevin McGrath
Long & Foster Real Estate Companies- Fredericksburg/Spotsylvania - Fredericksburg, VA
Long & Foster Real Estate Companies
Josette - thanks - I actually agree with Matt - I just like to keep him talking..........
Jan 02, 2008 07:33 PM #23
Anonymous
Lou

Wow, what disinformation. Valuable consideration is NOT earnest money. Earnest money is not required to have a binding contract. The concept of valuable consideration applies to the fact that for the "valuable consideration" of the purchase price, seller agrees to transfer title to the home. Look at it as an agreement that one will transfer money if the other transfers the house. Earnest money means nothing more than a show of good faith and financial capability. Please don't make it more than it is. See the keywords below "or obligated themself to pay money"

In general, consideration consists of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. Thus, a person who seeks to enforce a promise must have paid or obligated herself to pay money, delivered goods, expended time and labor, or forgone some other profitable activity or legal right. For example, in a contract for the sale of goods the money paid is the valuable consideration for the vendor, and the property sold is the consideration for the purchaser.

Consideration must be of value (at least to the parties), and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). In a contract, one consideration (thing given) is exchanged for another consideration.

Jan 08, 2008 09:27 PM #24
Rainer
12,491
Jan DeGiorgio
CENTURY 21 Southern Idaho Realty - Mountain Home, ID
Mountain Home Idaho Real Estate

Lou,

Your statement has always been my understanding of the part that EM plays in the process. The valuable consideration is the mutual exchange (hmm, guess if it was an exchange it would have to be mutual!) of promises.  The fact that the EM is is usually held in trust by a third party suggest that not even a constructive exhange (a term I just made up) has occurred.

Admittedly State case law rules in what consitutes a contract but I think that we'd have to thumb through a lot of real estate and business law text books to make the case that EM is a necessary element.

Jan 09, 2008 01:03 AM #25
Rainmaker
25,996
Matthew Rathbun
Coldwell Banker Elite - Fredericksburg, VA
ABR/M, CRB, CRS, SRS, ePRO, SFR, GRI

Here is an excerpt from a law dictionary: 

valuable consideration
n. a necessary element of a contract, which confers a benefit on the other party. Valuable consideration can include money, work, performance, assets, a promise or abstaining from an act.

Thus I stand by my comments I made way back on the 1st.  The Seller defines what he considers is valuable consideration from the purchaser.  Not us.  If you search Arello legal database, you'll find cases that say there MUST be valuable consideration on behalf of the purchaser, but that it can be many different things, so long as value can be mutually agreed upon and proven.

Pettigrew v. Collins in 2000 held that a contract wasn't valid because the Statute of Frauds wasn't met, in that the stated value of the consideration wasn't defined.

As I said before.... Even a promise can hold value if the Seller sees value in the promise.  My point is that it needs to be incorporated in the contract what exactly is being valuated on behalf of the Seller.

Also remember that should this issue go to court, a key element will be what is commonly accepted as value and did the Realtor advise their Sellers well in that regards.

I think the obvious confusion in the comments here are proof of my point...  Valuable consideration is required, but what is of value is an element of the meeting of the minds.  However, what will your client say when the buyer disappears in the night and they ask you what penalty the buyers had for doing so.  What is your answer going to be when there is no EMD or at least a  Promissory note?

Again, I am not an attorney and all I know is Virginia practice, so take it for what it's worth.  But even if I were an attorney, I bet if we got four of them in a room, we'd get "well, it depends...." followed by four different answers.

Jan 09, 2008 07:24 AM #26
Anonymous
Newbie
What happens if you loose that check? Whats the best way to tell your client. I feel like such and idiot.:((
Apr 12, 2008 11:24 PM #27
Anonymous
Scott

 Wow, couldnt beleive how many people on here that had it so wrong till i got to Lou.

 You are getting EM and Concideration mixed up.

You do not need EM "quote" to write a earnest money.

Go read your law

Aug 25, 2008 06:27 PM #28
Rainmaker
204,408
Mike Jackson
Bradley Real Estate - San Rafael, CA
Realtor - Certified Distressed Property Expert

it's definetly the norm in California and I'm assuming everywhere else that wants to show the seller that your buyer is serious in making a purchase.

Aug 25, 2008 07:10 PM #29
Rainmaker
211,965
Janice MacMillan
ERA Joyner Realty - Valdosta, GA
Associate Broker

Here, my broker likes to see about 2000.00 of earnest money. I remember a few years back when we bought our first home it was about 500.00.

Aug 25, 2008 07:18 PM #30
Rainmaker
320,317
AJ Heidmann
McEnearney Associates, Inc. - Alexandria, VA
YOUR Alexandria & Arlington, VA Real Estate Expert

The contract that is used in Northern Virginia stipulates that an earnest money deposit has been made either a check or promissory note.  99.9% of contracts in this area include a check written out to the buyer agents broker or a settlement company, usually in the amount of 1% for lower priced listings and up to 3% on higher priced listings.  If a copy of the check is not included with the offer, I contact the agent to see if their fax machine ate it.

However, I did use the promissory note in one transaction, as the buyers were waiting for funds to be transferred in from an out of state real estate settlement.

Aug 25, 2008 07:58 PM #31
Anonymous
Francine Taylor

Our offer got accepted but the agent gave us a list to submit before we get the executed contract.  yes, it's an REO.

And they want us to submit the actual emd, inspections, appraisal before it get's ratified.  Is that the norm?

May 06, 2009 05:58 PM #32
Rainmaker
129,139
Kevin McGrath
Long & Foster Real Estate Companies- Fredericksburg/Spotsylvania - Fredericksburg, VA
Long & Foster Real Estate Companies

Each state is different. In Virginia, what you are describing is not the norm.

May 07, 2009 05:42 AM #33
Anonymous
Jamie

As has been stated a few times here, the issue is whether there is recourse for the seller should the buyer walk away from a contract that included no earnest money -- and the answer is probably "it depends on the judge."

Offering 1% can be a lot of money.  For a buyer who's using a VA mortgage with no downpayment and asking for seller assistance with closing, coming up with that much cash can be really hard.  Putting something down, though, seems prudent.  I'd say that $1000 tells the seller the buyer is serious.

Feb 08, 2010 01:16 PM #34
Anonymous
Matthew Ryan

Wow, How many of you are attorneys? I stumbled upon this thread because I wanted to find an answer to this exact question. Is EMD necessary for a legitimate contract? A contract to purchase a home is not the only contract that we as realtors or real estate professionals use. Almost every day we use contracts with no EMD or escrow value of any kind. A listing agreement is a binding contract. A buyer agency agreement is a binding contract. I defy anyone to find were it is necessary to have an EMD in either of those contracts. After reading this thread I have decided to call my attorney and ask his opinion. I guess the internet is not the best place to find these kinds of answers. I personally think that Lou is correct and that consideration is the end product of the transfer and not a valuable consideration held by a third party at all. Thank you Kevin for bringing up this question. I am also a Realtor in Virginia.  

Mar 11, 2010 08:43 AM #35
Anonymous
Lou (again)

To go back to the original question. Yes, it is the expected norm but no, it is not required.

Mar 11, 2010 08:55 AM #36
Anonymous
JoBeth

Most of your protracted "contractual" verbage is meaningless today.  No wonder Realtor's are starving.

If a buyer has an Underwriter's Preapproval in hand for a 103% Rural Development HUD loan, there is no earthly reason why a bank sitting on a house wouldn't accept an offer without a deposit, knowing full well that the buyers are qualified to pay the mortgage and qualify as low income candidates for this particular loan type.

The one percent helps the buyer's bank account far more than application against their mortgage amount, which is zero! 

Most of these comments were spoken like true Real Estate Sharks. 

 

Oct 11, 2010 01:48 PM #37
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Kevin McGrath

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