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CHECKLIST:
What You Should Know
. . . Before Making Your Decision!
In the last issue of LAND RUSH, we covered topic
6 of 11 suggested questions you should ask before making your land
purchase decision. In this issue, we'll cover the seventh one -
about earnest money deposits - in depth.
7. How much earnest money should
you offer?
First, understand that there is no set amount of money required
for earnest money deposits. The amount is negotiable – it
can be whatever the buyer and seller agree is fair. That means it
could be $10 or $10,000,000.
Let’s pretend for a moment that you are the owner of a large
land tract priced at $450,000. I offer to pay your price by putting
$150,000 down and borrowing $300,000 from a local bank. I also offer
a $1,000 earnest money deposit and ask to close the transaction
in 60 days.
In effect I’m asking you to keep your property off the market
for two months, and your only security that I will close the transaction
is the $1,000 earnest money deposit. I told you I would put $150,000
down. If I have the $150,000 available for a down payment, why would
I only offer a $1,000 deposit?
There are several possible answers. First, I may feel that $1,000
is plenty for a deposit, a reasonable attitude for me to have. Second,
I may not want to risk more than that because I’m not absolutely
certain yours is the right property for me. If I find another parcel
I like better, I may be willing to walk away from my $1,000. Third,
I’m not a serious buyer. I’m not fully committed to
making this purchase.
As the seller in this imaginary transaction, which of two purchase
offers would you be most likely to accept – all other things
being equal? If both offers were for cash with one buyer offering
a $1,000 deposit, and the other offering a $20,000 deposit, which
would you accept? Better yet, why would you accept the one who offered
the larger deposit?
Your goal is to sell to a serious, qualified buyer, right? Doesn’t
it make sense, then, that the one offering the larger deposit truly
intends to complete the purchase?
So, here’s the message. To gain the maximum strength as
a buyer, show the seller you mean business. Before making a purchase
offer, make the commitment to yourself to complete the purchase
in a businesslike manner. Most sellers would consider a 5% -10%
earnest money deposit to be evidence of your intentions to consummate
the purchase.
On a large purchase, you may have most of your down payment tied
up in a bank CD, or a mutual fund to be liquidated prior to closing
the sale. In such a situation, try offering a smaller deposit when
signing the contract, with an additional amount to be payable a
week or two later.
Speaking from a more practical side, here are some things you
may want to know about making an earnest money deposit:
1. Making a Purchase Offer - Earnest money is
tendered along with a purchase offer. In other words, you provide
the deposit when you sign the offer. For accounting purposes it
is best to offer a check, rather than cash. Keep in mind that a
purchase “offer” is merely an offer until accepted by
the seller. Once accepted and signed by the seller, it becomes a
binding contract.
The broker will hold the deposit check, un-cashed, during the
time the offer is open. Once the offer is accepted, the broker is
obligated to deposit the earnest money into an escrow or trust account.
2. Deposits Held By The Broker - Once the contract
is signed, the earnest money is held by the broker in an “escrow”
or “trust” account as security until the transaction
is closed or consummated. It is not paid to the seller, but remains
held “in trust” until the closing date.
When purchasing directly from a “by owner”, the deposit
would normally be paid directly to the seller. This can be risky
since the money may not be returned in case of the seller’s
default or failure to close the transaction.
3. Default Situations - Most real estate contracts
provide for disposition of the deposit if either buyer or seller
defaults. For example, the contract may state: “ in the event
of default by seller, all earnest money is to be returned to the
buyer.” That seems simple enough, however there is more.
In the event of default, the broker is required to obtain a “release”
signed by both buyer and seller instructing the broker to whom and
in what amount the earnest money is to be distributed. Until both
buyer and seller sign the release form, the broker is not allowed
to give the money to either party. In the event that neither buyer
nor seller can agree, the broker may pay the entire amount to the
Clerk of Superior Court to be held in the Clerk’s trust account
until agreement is reached.
While this may seem cumbersome, just imagine trying to get a deposit
back from a seller who defaults – and has already spent the
money.
4. Closing the Transaction - During the contract
period, the deposit is held by the broker on behalf of the seller.
At the closing, the broker writes a check from the escrow account
to the closing attorney’s trust account in the full amount
of the deposit. This money is credited in full to the purchaser
at closing as part of the purchase price, ultimately ending up in
the seller’s proceeds of sale.
PAST TOPICS INCLUDE:
(click on a topic to read about it)
INTRODUCTION
1.
Has the property been surveyed recently?
2.
What is the topography of the property?
3.
Is the property accessed by public road or right-of-way?
4.
How much are the property taxes each year?
5.
Are there any restrictive covenants or zoning on the property?
6.
Will sellers finance the property or do they expect cash?
UPCOMING TOPICS WILL INCLUDE:
8. What, if any, utilities are
provided?
9. How much are the closing
costs to complete the transaction?
10. Are there any hunting leases
in effect on the property?
11. Are there easements or rights-of-way
for the benefit of others?
RETURN
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