Topic: Tips About the Earnest Money Deposit – Purchase and Sale of An Existing Residential Home
Most real estate agents use the NC Bar Association Form No. 2 Offer to Purchase and Contract when helping their clients in the purchase of sale of an existing residential home. I will assume for the limited purpose of this writing that the Form No. 2 is being used as the residential contract. The tips below don’t address an earnest money deposit for the purchase of a new home under construction which often involves depositing money directly with the home builder for the builder’s use during construction. This topic has a variety of other nuances for a future writing.
The tips below are focused on three areas of concern. 1) How much should a Buyer deposit, or how much should a Seller require on deposit; 2) Who should hold the deposit; and 3) What happens to the Earnest Money Deposit if a breach of contract occurs.
Paragraph 4 of the Standard North Carolina Bar Association and North Carolina Association of Realtors, Inc. Offer to Purchase and Contract provides for the Buyer to deposit, as an Earnest Money Deposit, an amount of money to be held in escrow by an “Escrow Agent” until the sale is closed or until the contract is otherwise terminated. There are many aspects to this subject and some of the issues can be complicated. However, I have detailed below some points to consider when dealing with this portion of the Offer to Purchase and Contract.
Points to Consider:
1. There is no stated “correct” amount of money to be paid as an Earnest Money Deposit as part of the language in a standard Offer to Purchase Contract between Buyer and Seller.
2. However, for the resale of existing homes, customarily most contracts I have reviewed evidence Buyers typically deposit a minimum of $1000.00 per $100,000.00 of the purchase price.
3. Consider making your deposit between 1-4% of the purchase price and this would be customary in our market.
4. From the Seller’s point of view, the more that is held by the Escrow Agent on deposit the more likely the Seller believes the Buyer is serious about the purchase of their home.
5. Money being held by the Escrow Agent is customarily held in a non-interest bearing trust account with the listing company or the trust account of the Seller’s attorney.
6. It is not uncommon for the Buyer’s attorney to hold the Earnest Money Deposit in the attorney’s trust account, but the custom has been for the money to be held in trust by the Seller’s listing agent’s trust account or the Seller’s attorney’s trust account. Remember, it is money for the Seller at closing and that is the basis of the custom.
7. The standard Offer to Purchase and Contract provides that if the Buyer breaches the contract the Seller is entitled to the earnest money deposit. “In the event of breach of this contract by Buyer, then all earnest monies shall be forfeited to the Seller upon Seller’s request, but such forfeiture shall not affect any other remedies available to Seller for such breach.” In the event of a Seller breach the law allows for the Buyer to ask the courts for specific performance. This is akin to asking the court to order the Seller to close on the sale of the property at the contract price.
8. If the Buyer breaches the Offer to Purchase and Contract, Form 2 specifically states that the Seller is also entitled to sue for other damages. Other damages would likely include carrying costs until the property is sold to another willing Buyer, and/or any loss due to a lesser sales price being paid by the ultimate Buyer
9. Under North Carolina law, if the Earnest Money Deposit is held in escrow in a real estate broker’s trust account, or an attorney’s trust account, a written release consenting to the release of the earnest money is required. Without a written agreement for the disbursement of the Earnest Money Deposit the Escrow Agent will need an order of the court.
10. Often the Buyer and Seller compromise about how to divide the Earnest Money Deposit to avoid a law suit, however this compromise must be put into a written release.
11. Attorney’s fees are typically not available for award by the courts in North Carolina in a breach of contract for the purchase and sale of a residential home. The standard Offer to Purchase contract makes no mention of the right to recover attorneys fees. Thus both the Buyer and Seller are typically better off resolving a dispute regarding the Earnest Money Deposit through compromise and a written release agreement.
12. As always, if ever in doubt of any legal aspect within the contract, take a few minutes to contact a real estate attorney. The common saying, “An ounce of prevention is worth a pound of cure.” deserves an extra measure of attention when dealing with any real estate transaction.