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Earnest Money Agreement


That All Important Good Faith Cheque


There should be an earnest money agreement cheque with the contract, when a buyer makes an offer on your house,. On this page we will cover;

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  • What is this earnest money deposit?


  • How much does is have to be?


  • How much should it be?


  • Where is the deposit held?


  • Exceptions





Before We Start


Before we get started on this subject, once again I have to remind you about my Disclaimer If you haven't done so, please read. Thank-you.

I'm going to assume that you know that the earnest money clause forms part of the Purchase and Sales Agreement.


As a for sale by owner, you should always have some of these forms on hand, which should include a clause concerning the earnest money, or "deposit".


I have searched and found a couple of super great sites to obtain these for sale by owner contract forms. For a list of these websites and why I selected them, please proceed to: Real Estate Contract Forms for the for sale by owner.



What is an Earnest Money Agreement?


First of all, an earnest money contract has nothing to do with the down payment on a house. However, it may be used for that purpose at closing.


The actual term "earnest money agreement" may also not be in the real estate terminology where you reside.


It could be called simply an offer deposit, or a good faith deposit, or some other name.


Whatever it's called in your area, they are for the following purposes.


  • The purchaser includes the deposit to show good faith to the seller, that they are serious or "earnest" in making the purchase.


  • Protects the seller in the event that the buyer gets cold feet, or breeches the agreement by just walking away, without due cause.



How Much Does the Deposit HAVE to Be?


In very simple terms, just about anything.


A buyer could make a deposit of $1.00 and that contract would be just as legal, as a deposit of $1,000,000.00.


I've also written purchase and sales agreements in the past that just used the words, "In consideration thereof", with no money attached what-so-ever.


So, unless you have some different real estate by-law that says there must be a certain amount or percentage, just about anything goes.



How Much Should it Be?


The amount of the earnest money agreement is basically up to you. That being said, keep the following in mind.


  • If the purchaser breeches the contract agreement and just walks away without completing the purchase with no justification, the best you will probably be able to collect, is that deposit held in trust.



Sure you could sue the buyer, but will you? Would it be worth the time and investment you would spend trying to collect?

A couple general rules I used when working for the seller are:

    The bigger the amount of the earnest money agreement, the better, within reason.
    The longer the possession date was in the future, the larger I wanted that cheque to be.

If you are selling your house for say $275,000.00, you might want to see a deposit for $2,000.00 on the low side, to $10,000.00 on the high side.

My own personal choice at the time of this writing, would probably be in the $5,000.00 range.

Why $5,000.00?

If you the seller, had your property held off the market for 30 days and then the buyer "walked", $5,000.00 in my opinion would be fair compensation.
   

If the buyer has an earnest money contract for $5,000.00, the buyer would think twice of nullifying the agreement and losing that amount of money.

If on the other hand you had a $25,000.00 deposit and the buyer walked, the buyer may fight for years to get that money returned. Ugly!



Where is the Money Held?


The first place the earnest money agreement should NOT be held, is in your personal chequing account. Why? That would be totally and absolutely unfair to the buyer.


The reason is, you as the seller would have total control of that money.


Lets say the buyer opted out of the contract because a clause could not be satisfied through no fault of the buyer.


You might just take the step of holding the monies that should rightfully be returned to the buyer. Sorry.


The good faith deposit when you are for sale by owner, should be held in a trust account that exist for that exact purpose, by the seller's lawyer. That means your lawyer Mr. and Mrs. Seller.


That is my advice. This way, your real estate lawyer can deal with the funds in a fair and legal way, whatever situation may arise, in an impartial manner.



Just as a side note: The earnest money agreement deposit, usually becomes part of the down payment on the house being purchased at the closing (possession) date.


Woman writing out earnest money agreement cheque



Exceptions


On occasion, the earnest money agreement may not include a deposit, immediately following the offer being accepted.


Here are a couple of examples:


The Buyer has a house to sell before they can buy your house. They may make the trust deposit subject to the unconditional sale of their property.


They may write in that they will make that money available, within 72 hours after that condition is met.


A first time buyer may have a really good income but be cash poor and buying their first house, with no money down.


You will have to make a judgment call, whether to accept a low earnest money agreement.


Many times a first time buyer may be able to get help from parents or another relative. There is no harm in asking them if this is possible.


Here is another site explaining Earnest Money Deposits



Legal Advice


Remember, you should always have those famous clauses that the offer is subject to the seller's and buyer's lawyer approval.


If you haven't seen this clause yet, you can find it here.Subject to Lawyer Approval Clause


For more Information about Offers and Clauses


How to Write Clauses

All About Time Frames

Conditional Offers or the SPPCounter-Offers

Chattels and Fixtures

Some Other Considerations


Contracts and Forms - Main Page


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