What about that earnest money?

Both buyers and sellers here in Pittsburg ask questions about the earnest
money check. What is its purpose? When is it cashed? Where is the
money held? Can the seller have it right away?

The purpose, of course, is to show good faith. It’s also to indicate
that the buyer does have the means to go forward with the purchase.
The amount varies depending upon customs from place to place.

Here in Pittsburg the earnest money is usually 2-3% of the
purchase price or a dollar amount.

The check is cashed as soon as the buyer and seller have come to
an agreement on the price and terms. Then it is held in a trust account
until the closing, when it is applied to the purchase.

The trust account may belong to the brokerage or to the title company
responsible for the closing. Either way, the account is for the sole
purpose of holding earnest money. Earnest money is never legally
comingled with operating funds.

Although the seller might believe he or she should have that money
immediately in exchange for taking the house off the market, it
doesn’t work that way. It merely acts as a safeguard, telling the
sellers that the buyers are serious so taking the house off the market
is less risky.

Buyers should take care to see that the account has sufficient funds
before writing an earnest money check, since an offer could be
accepted immediately and the check cashed the same day.

What if the transaction fails to close? Who gets the money?

The answer depends upon the circumstances and the reason for the
failure. If the agreement contained contingencies that cannot be met,
the money goes back to the buyer. On the other hand, if the buyer
simply says “I changed my mind,” the money would likely go to the

If the seller suddenly changes his or her mind, the money goes back to
the buyer.

However, before it comes out of the trust account, both parties  must
agree to its disposition in writing.

There are numerous reasons why a transaction might fail to close, and
thus numerous reasons why the parties might feel that the money
“belongs” to them. When they cannot agree, the issue will go to
mediation, arbitration, or a full-blown lawsuit.

A purchase and sale agreement is a legal contract, and the terms of
that contract should be clearly stated so there is no question about
the disposition of the earnest money.

When you choose me to represent you as either a buyer or a seller, I
will make sure that your contract terms are complete – with no
questions left unanswered and no “gray areas” to give rise to a
dispute should your transaction fail to close.