Is it required to give a certain amount of earnest money per contract?

Question

And if it's not required, what % of the time would you say that you do give an earnest money deposit?

Also, can I have a provision on my contract that says "If left blank, then no earnest money is due" or something to that end?

Thanks in advance~

James Hiddle · Answer

You don't need an EMD to make a contract legal and binding. You need consideration to make a contract binding and that can mean anything from your promise to fulfill the obligations of the contract to an EMD deposit.

An EMD is just a good faith promise that you are serious is going through a deal.

Michelle Murray · Answer

Tommy,

Keith is right!

You must have something in escrow for your contract to be valid and legal.

When wholesaling, I usually use $10.00 to tie up my deals. Very motivated sellers, which are the one's you'd be dealing with hopefully, rarely dispute this and usually will go along without asking any questions.

Michael Quarles · Answer

Hello Tommy

An offer needs a consideraton. I use the following promise...

Deposit(s) to be held in escrow by Company of Buyer’s choice. Deposit to be placed into escrow prior to the closing of escrow in the amount of:	 $ _______________. 00.

The amount of deposit is a negotiated item.

As for a short agreement or long agrement.  California Association of Realtors agreement is longer then my 9 page agreement.

Agreements are created to protect our interests... The more protection IMHO the better.

Account Closed · Answer

Contract law does not require an earnest money deposit to be legally binding, except in some unusual situations. If I recall correctly, California law requires about $100 deposit on a residential pre-foreclosure owner occupied home. Check with your RE attorney for such weird situations in your state.

For a "normal" arms-length deal, a legally binding contract must have an equitable exchange of consideration, or the promise of an equitable exchange of consideration. Most real estate transactions involve the promise of an equitable exchange. "The buyer shall deliver $100,000 to the closing agent by a certain date and the seller shall deliver clear marketable title to the closing agent by the same date." That's a legally binding promise of an equitable exchange of consideration. An earnest money deposit is NOT required, unless the parties to the contract specifically agree that it IS required.

The earnest money deposit is NOT consideration, because it has no relation to the size of the transaction, both parties have a claim on the deposit until the contract is concluded (even non-refundable EM is refundable in the event the other party does not perform), and in some cases the SELLER is required to provide the earnest money deposit rather than the buyer. (Hint: Think "buyer specific performance".)

Most RE brokers don't understand contract law (they must have slept through that part of their pre-licensing class). They also think that an EM promissory note cannot have 0% interest. They mistakenly confuse 0% as meaning "no interest rate". 0% is an interest rate. An unspecified interest rate is invalid.

J Scott · Answer

Tommy -

Only an attorney in your state who is familiar with real estate contract law should be advising you on this.  Better yet, use an approved state contract that has already gone through plenty of attorney review.

Tommy R · Answer

OK, so I just want to make sure I'm doing it right, here's my 2 sections, tell me what you think-

3.	PURCHASE PRICE.  The purchase price for Property to be paid by Buyer shall be $____________________________ subject to adjustment as hereinafter provided (“Purchase Price”). Buyer shall deliver to Seller within 2 days following the Effective Date the amount of $15.00 as non-refundable consideration for this Agreement.

and further down:

11.	EARNEST MONEY.  Buyer shall deposit with the Title Company the amount of $___________ as “Earnest Money” for Buyer’s obligations hereunder. In the event (i) Seller Fails for any reason to close this purchase and/or (ii) the Property is damaged by any peril the Earnest Money shall be immediately refunded to Buyer. Agreement may be recorded of public record. Earnest money deposit(s) to be due after inspections have been approved by the Buyer. If blank, then no earnest money will be required beyond the non-refundable consideration for this Agreement.

-so please tell me if this is OK, especially the EARNEST MONEY section.
Thanks

J Scott · Answer

Either is acceptable, though escrow is safer.  If you had any substantial amount of money tied up, you wouldn't want to give the seller the opportunity to walk off with it.

Tommy R · Answer

Thanks for the feedback everyone,

for further clarification, the consideration amount, in the contracts is stated this way:

"Buyer shall deliver to Seller within 2 days following the Effective Date the amount of $15.00 as non-refundable consideration for this Agreement."

So my last question is, do I pay the Seller directly or is do I simply put it in escrow?

J Scott · Answer

James is correct; EM is not required to have a valid real estate contract.  Contract law is clear that consideration is necessary, but that for a real estate transaction, the promise to sell (and the promise to buy) real property is considered consideration.

That said, if you expect a contract dispute, having an EM deposit may help strengthen you legal standing, but it's certainly not required for a valid contract.

Tommy R · Answer

Thanks for the info guys,

yes Keith my contract is actually just a little shy of 2 pages, it's short and concise and I put it together by consulting about 3-4 other contracts provided to me by other people I know, and some members here (thanks if it was you :)  ),

so then as James is saying I dont need an EMD, just to give a certain amount as a non-refundable consideration, (though my EMD I would want to be refundable, in case I am unhappy with the property), hence why I want to keep them separate.

Is it required to give a certain amount of earnest money per contract?

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