The Ohio Association of Realtors just produced a video regarding the legal implications of earnest money as it can be one of the most confusing aspects of a real estate transaction, and the video release is timely because I’ve seen a definite shift in seller thinking about earnest money so I thought this would be a good topic to discuss in some general terms. What is “earnest money”, what does it do, and how is it disbursed?

Please note: I’m a Realtor, I am not an attorney and I don’t play one on TV. What is included here is intended as very basic, general real estate information so if you need legal advice, please consult your attorney.

Also note: Real estate is local. If you are reading this from outside the Dayton area, please get specific advice from a local real estate agent.

In Dayton it’s called “Earnest Money Deposit” in other areas it might be called a “Good Faith Deposit” but regardless, the purpose remains the same- to let a seller know that your offer is serious and prevent a buyer from simply walking away from a home because of cold feet or a change of heart without losing something of value. An Earnest Money Deposit (EMD) is an amount of cash that a buyer offers up, to be delivered upon acceptance of an offer. But it’s not given to the seller, it is held in a non-interest bearing escrow account, and is not co-mingled with a broker’s operating funds. Here’s how the EMD is explained in the Dayton Area Board of Realtors (DABR) Purchase Contract:

EARNEST MONEY; DEFAULT. Upon presentation of this offer, Purchaser has delivered to _____ Broker, the sum of $_______ as earnest money, to be (1) deposited in the Broker’s trust account promptly after acceptance of this offer or (2) returned to Purchaser upon request if this offer is not accepted. The earnest money shall be paid to Purchaser or applied on the purchase price at closing. If the closing does not occur because of Seller’s default or because any condition of this Contract is not satisfied or waived, Purchaser shall be entitled to the earnest money. If Purchaser defaults, Seller shall be entitled to the earnest money.

Sellers need to understand that the money is not a deposit for them. It does not go to them at closing, it is not theirs. Buyers need to understand that they can get that money back at closing if the terms of the contract are met. Both parties need to understand that they both have to agree on how the funds are disbursed. More from the DABR Purchase Contract:

The parties acknowledge, however, that the Broker will not make a determination as to which party is entitled to the earnest money. Instead, the Broker shall not release the earnest money from the trust account until one of the following occurs: (1) the transaction closes and the Broker disburses the earnest money to the closing or escrow agent or otherwise disburses money pursuant to the terms of this Contract; (2) the parties provide the Broker with written instructions that both parties have signed that specify how the Broker is to disburse the earnest money; (3) the Broker receives a copy of a final court order that specifies to whom the earnest money is to be awarded; or (4) the funds become unclaimed and the Broker turns them over to the Division of Unclaimed Funds. In the event of a dispute between Seller and Purchaser regarding the disbursement of the earnest money, the Broker is required by Ohio law to maintain such funds in its trust account until the Broker receives (A) written instructions signed by the parties specifying how the earnest money is to be disbursed or (B) a final court order that specifies to whom the earnest money is to be awarded. If within two years from the date the earnest money is deposited in the Broker’s trust account, the parties have not provided the Broker with such signed instructions or written notice that legal action to resolve the dispute has been filed, the Broker shall return the earnest money to Purchaser with no further notice to Seller. Payment or refund of the earnest money shall not prejudice the rights of the Broker(s) or the non-defaulting party in an action for damages or specific performance against the defaulting party.

So, once an offer is accepted, try thinking of the EMD as belonging to both the buyer and the seller and they both have to agree on what happens to that money. As the contract states, if “(1) the transaction closes … the Broker disburses the earnest money to the closing or escrow agent or otherwise disburses money pursuant to the terms of this Contract”. We always defer- we have to do what the contract states, so if the there is a successful closing, the money is disbursed at the closing table, typically to the buyer, or if there are other instructions as to how that is disbursed, then we follow those terms. But what if it doesn’t close? We still follow the contract:

(2) the parties provide the Broker with written instructions that both parties have signed that specify how the Broker is to disburse the earnest money;

There is a specific form that will attach to the contract and gives the broker specific written instructions, agreed upon by both parties. Sometimes the money is just given back to the buyer and everyone moves on, sometimes the two parties split the money and move on, or the seller could end up with the money. It’s all negotiated and agreed-to in writing, or the broker is not allowed to release the funds. But what if the buyer and seller cannot agree to how EMD should be released? Again, we defer to the contract:

(3) the Broker receives a copy of a final court order that specifies to whom the earnest money is to be awarded;

If the parties cannot agree, one of the parties has the right to take the issue to small claims court and a judge decides how it disbursed. But even that doesn’t always happen, so then our contract says:

or (4) the funds become unclaimed and the Broker turns them over to the Division of Unclaimed Funds. In the event of a dispute between Seller and Purchaser regarding the disbursement of the earnest money, the Broker is required by Ohio law to maintain such funds in its trust account until the Broker receives (A) written instructions signed by the parties specifying how the earnest money is to be disbursed or (B) a final court order that specifies to whom the earnest money is to be awarded. If within two years from the date the earnest money is deposited in the Broker’s trust account, the parties have not provided the Broker with such signed instructions or written notice that legal action to resolve the dispute has been filed, the Broker shall return the earnest money to Purchaser with no further notice to Seller. Payment or refund of the earnest money shall not prejudice the rights of the Broker(s) or the non-defaulting party in an action for damages or specific performance against the defaulting party.

The contract is very specific about EMD and it’s imperative that everyone understands how they could be impacted by an earnest money deposit.

How much money should a buyer put down? Everything is negotiable and EMD is no different. Personally, I think the minimum they can get away with and still let the seller know they are serious is best, as a buyer you certainly don’t want to tie up your money unnecessarily as we just discussed it can be a point of negotiation and possible contention. So what’s typical? Well, foreclosures almost always ask for $1000.00, but sometimes a seller will take as low as $250.00 or $500.00 on lower priced properties. It varies from property to property and transaction to transaction, but figure between 5 and 10%. Also, while it is typical for an EMD to be a personal check, and it is customary for the buyer’s broker to hold the EMD, some sellers will want to have the EMD be a certified check and they will ask for their broker to hold the EMD, but remember, how the EMD is handled is determined by the contract, so neither broker can make an independent decision on how or when to release the earnest money.

While we see signs that the market is improving, we are a long way from the days where a seller would simply release the EMD because they knew another buyer was right around the corner. Earnest money is an increasingly critical negotiating tool, and in 2009 the Dayton Area Board of Realtors Purchase Contract changed to provide the detailed instructions you see above, so don’t be surprised if a seller asks for a large EMD to make sure a buyer is serious, or does not agree to Release of Escrow without a fight. Each transaction and each offer will hold some unique circumstances so please ask your real estate agent or lawyer as many questions you need to feel comfortable with the earnest money.

Looking for some insider baseball? To get the nitty gritty on some legal issues regarding earnest money, check out the Ohio Association of REALTORS Attorneys Peg Ritenour and Lorie Garland as they talk to REALTORS about how to deal with earnest money accounts with regard to Ohio laws.