Does a buyer have to submit his earnest money with the offer?

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A woman in a orange shirt signing a check.

03/04/2016 | Author: Editorial Staff

I submitted an offer to a listing agent on behalf of my client, who offered to pay $1,500 in earnest money. This listing agent reviewed the offer but said he wouldn’t present it until he received the check. He said if the seller accepts my client’s offer, then the earnest money is necessary for the offer to become a binding contract. Is this true?

No. Earnest money is not necessary to make an otherwise accepted offer into a valid contract. Earnest money is a buyer-performance item required to be deposited after a contract is fully executed. A contract could become effective even if no earnest money is required in the agreement.

While a seller could instruct an agent to only present offers that include an earnest-money check, an agent who decided himself that he will not present an offer without an earnest-money check may be violating the Code of Ethics’ instruction to present all offers as quickly as possible.

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Categories: Forms, Legal, Buyers, Sellers
Tags: earnest money, forms, contracts, legal, legal faq, buyers, sellers


Comments

Nita on 06/27/2016

Tee, legally the contract becomes binding and effective when acceptance is completed and that acceptance is delivered to the other party. Earnest money is not a requirement for a contract in Texas to become binding if it is a single family home. The terms inside the executed contract determine if earnest money is required and when it needs to be delivered.

bj stracke on 06/27/2016

Tee…

There really isn’t enough information to comment on you specific situation here, though I disagree that the title company is who decides who receives the earnest money.  No matter the situation or timing the parties (Buyer and Seller) decide who receives the earnest money.  Hopefully your Seller’s will agree to release the money to you all by signing the earnest money release your REALTOR prepared.  The title company can only do what the parties together instruct them to do.  If Buyer and Seller do not agree who is to receive the earnest money the title company has no clear direction and should not release any of the earnest money.

This is a thread regarding another matter, you may want to start a new one on this issue–

 

David Davis on 06/27/2016

@ Tee Jones.  Contact your REALTOR® first for answers and if you can’t get your questions answered, you are going to have to dismiss that REALTOR®, and either hire another one, or you are going to have to contact an attorney.

Tee Jones on 06/27/2016

It says upon execution of the contract the earnest money is to be paid.  We were definitely under the impression that 10 days excluded the weekend.  And we had been going back & forth with our realtor for quite some time trying to get some clarity to ensure we would be able to get our earnest money back if we decided to terminate the contract. It’s just extremely frustrating because we were told so many different things.

David Davis on 06/27/2016

@ Tee Jones.  If all you purchased was a 10 day Termination Option Period then correct, your Termination Option Period had expired.  The Termination Option Period starts to run on the Effective Date of the Contract which is the date it is signed (and typically ratified) by alll parties.  The Earnest Money is decided by the terms of the contract.  What does your contract say?

Tee Jones on 06/27/2016

My husband & I signed a contract on a home on June 15th, paid the earnest money on June 18th, inspection was done & completed on June 22nd. My husband & I went over the inspection report & found a lot of things wrong, but we still decided to tell the realtor what we wanted repaired on June 23rd. Over the weekend we still hadn’t heard from the realtor stating if the seller agreed to fix anything which of course gave us even more time to think about what a mistake we would be making if we purchased the house because of all the damage. So the morning of June 27th we decided to terminate the contract, which is also the same day the seller agreed to fix what we wanted repaired. The realtor sent us the termination contract over to sign when we got ready to sign it she stated that the 10 days was up for us to terminate our contract on June 26th, we were under the impression that contract wasn’t truly executed until earnest money was received.  She stated that it was up to the title company on whether or not we would receive our earnest money back.  Because the damages in the home were so severe & it was only 1 day outside of the 10 days, are we still entitled to our earnest money?

David Davis on 03/27/2016

@ Vickie.  This is Texas.  Texas is in the United States of America.  Our promulgated contract forms are in the English language for a reason.

Vickie Tolentino on 03/26/2016

Queridos amigos, agradezco la oportunidad, pues la verdad es necesaria la traduccion de la informacion relacionada con los Bienes Raices, reglas, regalmentos y formas.
Pero o yo estoy perdiendo el espanol… o las traducciones son de Gogle .. y no son buenas . Se me complica entenderlas ,pero existen traductores que ayudarian con gusto ... Sn profesionales y traducen como se debe, al correcto espanol. Es urgente pues seria mas sencilla la vida… profesional .. gracias
Y si puedo ayudar con gusto . Soy de Mexico DF y ahora vivo en San Antono
Vickie Tolentino 210 371 1958

Shahedul Islam on 03/12/2016

Very good useful information. We have some realtor try to make some new rules and it is hard to work with. I think it will be good useful information for others and we all should follow.

Stuart Scholer on 03/12/2016

Out of practical wisdom and experience I always tell my Seller Clients that they should not focus on the EM as something that they can easily get their hands on if the Buyer defaults on the Contract. Although a Buyer default may be obvious (according to the Contract), I inform the Seller that the probability of a Buyer just walking away from their earnest money without asking for at least portion of it back is not high… maybe a little better than 50/50. It is just too easy to “hold up” the EM and put a shadow on the Seller’s ability to move on with the sale of their property.  So it is best not to place an unrealistic importance on the function of the EM.

David Davis on 03/12/2016

Hold it! Hold it! Hold it! Right there!  Stop the presses! Buy that man a cigar!  Thank you Rick!  What is so hard about reading and following simple instructions?  Unless the Agent is a party to the contract, butt-out and let the parties resolve the diferences, and get paid!  Afterall, isn’t that why we got into real estate brokerage?

Rick DeVoss on 03/12/2016

Thank you for such a good suggestion, Theresa!
Too many times we forget to shield personal information when we don’t know who is looking at it.

Submitting a copy of a check by fax or email is a token appeasement to the agents and their sellers who think that an offer is not valid without “earnest money.”  ~Does it really matter that the buyer “wrote a check”...?  Seems to me that it is worthless until it is deposited at the title company.  ...Anybody can write a check, but that does not prove that the funds are in the bank.

I saw one buyer who submitted a ‘check’ to the title company, and after they deposited it, it was discovered that it was drawn on a Mastercard charge account.  So the money was “borrowed”, and since she intended it as part of her Down Payment, it was classified as Fraud!    (The transaction was stopped.)

So what good was a copy of That check??

It seems that many of us having been doing things for a long time that come under the category of tradition, and not a practice following law or agency rules.  ~It is time we get specific direction from attorneys, or our governing agencies.

If earnest money had to be submitted to the seller, then a “copy” of the check would not suffice.  So we should all do what is right: submit the offer to the seller, and the earnest money to the broker or title company.  ~Listing agents need to stop trying to rewrite the rules.

THERESA AKIN on 03/12/2016

When I present an offer from my buyer, usually a copy of the earnest money check accompanies the offer with the account numbers blackened.  We go from there.

Rick DeVoss on 03/12/2016

It sounds like some folks out there need a few more CE classes.  ...Especially Mr. Simon Hall.  The Option Fee has changed from “2 days” to 3 days a long time ago.

The contract language stipulates who is ‘responsible’ legally for delivering Earnest Money.  ~To allow the buyer to get to the title company whenever he feels like it is not what I would call a competent agent.  ...Isn’t that one of the points of representing a buyer??  ~As a buyer’s Agent, I would always expect to take the check to the title company, but perhaps I am just old fashioned about such tasks.

I agree that our TREC contracts need to be more specific about delivery of
Earnest Money.  ~Why should it be any different than the Option Fee check?

And who said that the weekend days don’t count?  Earnest Money can be delivered to the listing agent/broker.  ~But I have always found that it is nice to be courteous, and discuss the issues with the other agent.  Perhaps one of you lives closer to the title company, or to the other’s person’s office.  We need to show courtesy to our fellow agents.

Keep in mind:  it is usually the buyer’s agent, and the buyer, who need to go to the title company, and sometimes more than once during a transaction.  ~Therefore, the title company to be used should be convenient to the buyer and his agent.  More importantly, it should be located near the property instead of near the listing agent’s home address.

Too many times these days, I see agents coming all the way across the Metroplex to list a property, and then expecting everyone to go to the title company closest to their home location.  Keep in mind that the seller also has to go to closing, and so may wish to use a title company near the property.

Yes, I know there are exceptions to each closing.  But USUALLY the buyer, the seller, and the buyer’s agent are all oriented around the location of the property.  So we three don’t really care where the listing agent lives or has an office.  ~There is no rule, nor has there ever been, that the listing agent should be the one to select the title company.    (And Please don’t tell me it is the “seller’s option”, as we all know that most sellers don’t even know of a title company.  As long as they get their money, they don’t care.  The buyer and his agent should be the ones to make this determination.  ...Or at least discuss it with the seller when an offer is made, instead of acting like it is in concrete when placed in MLS.)  If you expect the buyer to “write the earnest money check” before an offer is agreed to, then he should be allowed to select the title company he wants to.

Otherwise, an offer could be fully executed without a check, and then you can give the buyer a week to get a check over to ‘your’ title company.  (That is at least how long it takes to mail one.)

 

bj stracke on 03/12/2016

@David Davis Thanks for the kind words.  The TAR commercial (improved and unimproved) contracts already have better language, “Not later than 3 days after the effective date, Buyer must deposit $_______as earnest money…”  Relying on the language in the current 1-4 residential, unimproved, and farm/ranch contracts leads us to ask what does ‘upon execution’ mean, and that sounds like a legal question to me–

David Davis on 03/12/2016

@ bj Nice catch!  I had to check this out.  I went to Chuck Jacobus who is the chair of the Broker/Lawyer Committee and he confirms that this will work.  In fact he said the committe has had requests to make the EM period three days just like the option fee but they have done nothing with it thus far.

Stuart Scholer on 03/11/2016

@Simon…. Simon…. Simon.
What city in Texas?
I ALWAYS encourage my Buyer to Buy an Option to Terminate even if the deal was for $300 dollars and to be paid in gold with a closing within 3 hours of execution. WHY NOT??? What do you have to lose? Of course with a 3 hour closing I would have to forfeit my THREE DAYS to deliver the Option Fee.

bj stracke on 03/11/2016

@David Davis–“I think you are confusing the Additional Earnest Money portion of the 1-4 with Earnest Money.  Earnest Money must be deposited upon execution on the 1-4. ”  I don’t think I am confused.  My suggestion was to use the Additional Earnest Money section to set a hard date, not add additional time.  You are assuming that the phrase “upon execution” sets a time line, but as TAR Legal points out: “A buyer who wants to deposit the money himself should remember Paragraph 5 of TREC contracts, which provides that the buyer shall deposit the earnest money upon execution of the contract. The deposit of earnest money is a buyer obligation once the contract is effective. Like most performance obligations in the contract, time is NOT “of the essence.” Therefore, the buyer has a reasonable amount of time after the contract is executed by all parties to deposit the earnest money. “Reasonable time” depends upon the circumstances and could be decided in court if there were a dispute over it.”  Using the Additional Earnest Money section allows a clear time line: “Buyer shall deposit additional earnest money of $___________ with escrow agent within _____ days after the effective date of this contract.”  I thought this suggestion might be more appropriate than adding something to Special Provisions or allowing the courts to decide what a reasonable time may have been.  What is wrong with entering “$0” for Earnest Money, “$1,500” for Additional Earnest Money (to use the example this thread started with), and “two (2)” for the within days blank?  A simple promulgated way to use the form and more clearly define when the earnest money is due.  There are number of “reasonable” arguments presented here for why Buyer’s do not deposit earnest money when Seller’s and their agents expect.  Why not use the promulgated form to be more precise?

David Davis on 03/11/2016

@ Simon So much mis-information that it’s hard to know where to begin…

Simon Hall on 03/11/2016

Here in Texas we have 2 business days before 5pm to deliver option and earnest money checks. If an offer gets submitted at 5:01 Friday you should expect a check by 4:59 Tuesday. Why would you deny an offer for 4 days just because there’s a missing check that is not yet required. This is bad business and options and earnest money is not required to have a deal at all. There can be $0 option and $0 earnest money for a deal. Imagine selling a 25k lot. Do you really need options and earnest money? Same thing with a million dollar deal.. Let’s say it’s a cash deal with at 3 day close. you could be closed before 4:59 Tuesday instead of waiting on a couple of negligible checks.

Lois Gallagher on 03/11/2016

Earnest money will go back to the buyer almost all the time so the option check is the one that offers relief to the seller.

Stephen Williams on 03/11/2016

First, since the advent of “options” in residential real estate, I’ve always been a fan of substantial option fees, and have viewed earnest money amounts as usually less significant.  However, as we all know, most of our peers disagree.  Including TREC, who describes the option fee as a “nominal” amount in the contract form.  My theory is that significant option fees separate the serious buyers from the tire kickers.  The only variance from this that I can think of, is properties that have known serious defects that will take some time and money for a buyer to “unpack” during an option period.  But as mentioned by a previous contributor here, often those properties are better addressed with a pre-contract inspection.  Each situation calls for a common sense approach that fits, but sometimes big option $ makes the best sense.  What is the legality of limiting option fees to a nominal amount?

Regarding earnest money with an offer, I think the question is not so much the “binding contract” question, but the “complete offer” question.  Again, common sense for the particular case should prevail, but sometimes I’ve found it best to suggest to my seller that he shouldn’t consider the offer complete without earnest money, before they consider signing it.  Is that wrong?  After all, if a buyer or buyer’s agent has some hesitancy a/o inability to write a check to a title company, isn’t that a glaring red flag?

As far as I know, there’s no such thing as a “binding offer”.  And we all know it’s easier to reject an offer than terminate an effective contract.  We’re in the business of closing deals, not effecting contracts.

David Davis on 03/11/2016

@ BJ I think you are confusing the Additional Earnest Money portion of the 1-4 with Earnest Money.  Earnest Money must be deposited upon execution on the 1-4.  It is Additional Earnest Money that has additional time.  Are you suggesting putting zero or some very small number in the earnest money blank and then the “real earnest money amount” in the additional earnest money blank in an attempt to gain those extra days to deposit the money?

Rick, I guess, I’m puzzled at your comments as well.  You know as well as the rest of us that the contract states the earnest money is to be deposited upon execution of the contract.  It says so in the very first sentence of paragraph 5 of the contract (1-4).

Stuart Scholer on 03/10/2016

I represented a Seller. We had a cash offer.
It was a little less than the Seller wanted. The Buyer said “as is”.
The Seller said to accept the offer but only on the “as is” basis.
Unless there was some major surprise at inspection there would be absolutely “no repairs”. The Seller said $2500 option fee…. no EM. The Seller also gave the Buyer authorization to do any inspection or assessments BEFORE signing the contract.
This worked very well.

Rick DeVoss on 03/10/2016

In several decades of selling residential properties, I have never experienced some of the difficulties the previous agents have mentioned.  But then everyone needs to use common sense, as well as following the rules.

The “Contract” is effective when signed by both parties.  No earnest money is required.  If no earnest money is presented, it does not mean that the contract is void.

What is “earnest money”...?
It is the amount that the seller will get if the buyer defaults on the contract.  ...So consult your seller, and ask them how much would be enough.  Put it in MLS remarks so that the buyer’s agent knows up front what to collect.

Does it make sense to deposit earnest money before the Option Period is up?  ...Maybe   ...Maybe not.  Make it clear to both parties.  But if the buyer cancels during the Option, then you have to go through the hassle of returning the earnest money, and getting releases signed.

Should the Option Fee be a small number?
What if you were the seller?  What do you deserve for taking your house off the market for a week or two?

Does it really matter if the Earnest Money is a small number?
Maybe most of us have it backwards.
Maybe we should be getting a larger Option Fee check, and a smaller Earnest Money check.  ...Or maybe they should Both be larger!

...Seems like it depends on which side of the transaction you are on…

bj stracke on 03/10/2016

TAR commercial contracts (improved and unimproved) require earnest money be deposited with the title company not more than 3 days after the Effective Date.  1-4 residential, unimproved, and farm and ranch contracts offer a promulgated way to require earnest money to be deposited with the escrow agent within a desired number of days after the effective date.  In cases where the seller has not issued specific instructions regarding the earnest money, why not suggest using the Additional Earnest Money section as part of the counter process to require the Buyer make the deposit timely rather than using the open ended Earnest Money section?

Allison Allen on 03/10/2016

Another slant on this…I have been in the unfortunate position two different times where my sellers accepted an offer, everyone signed off and option and earnest money were to be deposited forthwith.  Both buyers failed to deposit option or earnest and within 24hrs of signing went silent with their agents.  Neither check was ever deposited, the buyers (both investors BTW) disappeared without another word.  Both times TAR maintained that there was no timeframe a buyer had to deposit the earnest money essentially taking the position they could deposit up to the close date. (!).  Best course was for seller to not re-market the property until the close date had come and gone.  I have never understood that since the contract says that ‘upon execution of contract by all parties, Buyer shall deposit as earnest money etc etc’.  To me that says, they have a reasonable time after execution to deposit, like maybe a couple of days.  If they don’t, the seller should be able to give them notice saying they will terminate contract if it is not received by such and such date and then do it.  But that isn’t TAR’s position at least it wasn’t last spring.  So I can understand someone being very persnickety about earnest money even if it isn’t technically needed to make the contract binding.  It can really put your seller in a bad position.

Kathleen Meece on 03/10/2016

I love this business but do not offer my services 24 hours a day/ 7 days a week…If i did i would burn out and although is meant to be funny, I do have to set realistic times I do business. I ask for at least a copy of the earnest money check along with the option check if business is done via the internet after my work hours which ends at 8 pm. Email is how I receive most offers these days to my company and I realize you can’t email money to us for now.  I remember meeting agents in parking lots at 10 pm for a contract and earnest money (yes this was before the option money paragraph was added) years ago. Business is different today but each office has a policy for work hours and accepting offers including any money required in the contract.
I ask for the earnest money and option checks (3 days now) NOW upon the effective date of the contract.  It just shows a selling agent is doing their full job to get a completed contract, a pre-qualification letter, option money and earnest money to get a seller’s full attention. Most markets have competing offers, so you might just get one shot at the property.  Give the listing agent all you can to get your buyer’s offer accepted including all the items asked for in the TAR or TREC contracts…not brain surgery

JB Williamson on 03/10/2016

I have yet to run into a seller or buyer that finds it acceptable to hold an offer over the weekend, until Monday.  If you don’t want to work weekends that’s OK, but at least have a partner, team member or another agent in your office pass on the offer.

The buyer may have a second choice in case the offer is not accepted.  If the buyer has to wait 48+ hours to find out, the second choice may be gone.

Doug Mellen on 03/10/2016

The editorial staff made it pretty clear in this article.  Don’t make it so difficult and don’t practice law.  Standard of Practice 1-6 is also pretty darn clear.  “REALTORS® shall submit offers and counter-offers objectively and as quickly as possible.”  That can account for MANY different reasons to not deliver an offer immediately, but, obviously, if the property is bank, or institutionally owned, that may mean on Monday if the offer comes in Friday afternoon late or the following day if after business during the week.  I don’t see that we should have create elaborate notifications—just communicate with each other and your buyer/seller client/customers, it is common sense.

Nita Shinsky on 03/10/2016

I prefer not to have earnest money prior to the expiration of the option period and even then, I suggest to my sellers to request much higher option and very little earnest. Agents in my market aren’t as comfortable with it but I’m also an out of the norm kind of broker.

Buster Spillar on 03/10/2016

Have never run into that situation before..
However, I do submit Xerox copies of the Earnest Money check and the Option Check when I submit the offer..  Then if offer is accepted, I have title company send a runner to pick originals up from the buyer or myself if they are left with me..

Barbar Rusling on 03/10/2016

If a Seller is a corporate entity such as a bank on a foreclosed property, the listing agent may be unable to present offers when the business is closed.  Hence information like “offers received after 5PM on Fridays will be presented Monday AM” might be helpful for cooperating brokers to know.

David Davis on 03/07/2016

@ Lauren, I think your post indicating that the Agent would have trouble for not collecting the earnest money is misleading.  Especially if the Agent is not indicated as the Escrow Officer on the contract.  The earnest money needs to be deposited with the Escrow Officer as indicated on the contract.  I know what you are saying, but there are some things, the buyer has to do for themself.  They also need to know the importance of getting it immediately deposited.  That is, after all, the topic of this post.  As for using special provisions, I really hate using that paragraph on any of the forms, but in this case, I would agree with you.  On a listing agreement, if the seller gives instructions to the listing broker to not submit offers unless they meet certain criteria, I think special provisions might be the right place to put those instructions.  I wonder where someone else might put them?

Lauren White on 03/07/2016

While it is true that a Contract does not have to have earnest money to be effective, if the Contract calls for earnest money and the agent does not collect it at the time of the offer, she or he could have issues for not collecting it if the Buyer doesn’t come forward with it.  It may be a good idea for Brokers to have a clause in special provisions of their Listing Agreement with a Seller that the Broker is only to submit offers to the Seller with either the earnest money in hand, or in the event of a coop, a copy of the check, prior to presenting.  Additionally, the Buyer could be held in default under the Contract if they do not get the earnest money into title.

David Davis on 03/05/2016

@ Linda, Yes it could be both ethical, and in the best interest of the of the client.  It depnds on the instructions of the client.  However, without those specific instructions from the client, I would take your side and pose the same questions.  Real estate brokerage is a 24 hour a day, 7 day a week profession.  If you take on the responsibility of representing a client, you do so with the understanding that you might be handling that client’s real estate transaction at some unusual hours.  If you are not prepared to do that, you should not take on that assignment.  Refer it to another agent for a referral fee, and move on…

Linda Dietz on 03/04/2016

Having read that response, it brought another question to mind. There are REALTORS that put in MLS remarks that any offers received after 5 PM on Friday ,  will not be presented to the sellers until Monday.  Is that ethical ?  And is that truly in the best interest of the seller your client ?

Lane Mabray on 03/04/2016

David is absolutely right….I ask for a copy of the EM ck with the offer….If the ck submitted after executed contract and it is insufficient funds then buyer is in default….

David Davis on 03/04/2016

@ Judy, Are you insinuating the check maybe invalid or insufficient funds?  I am not sure I follow your thought process here if otherwise.  I think the original post makes very clear that earnest money is a performance item on the part of the buyer.  If the buyer fails to perform either by not depositing the earnest money, or by issuance of a worthless check, then the buyer is in default, and the seller may exercise remedy at law under the terms of the contract.

Judy McKee on 03/04/2016

It also needs to be said if earnest money is typed in the contract then it has to be a part of the offer. Your article does not clarify that if you include in your offer that earnest money is a part of the offer as good faith, than buyer has to make check good with offer.

David Davis on 03/04/2016

As a listing broker if a seller were to tell me not to submit an offer without earnest money (or anything else for that matter) I would get that in writing, and disclose the same to all cooperating Agents in the private/Agent comments section of MLS.  There is nothing I hate worse than an incomplete offer that I cannot present to the seller becasue of some caveat that the seller has established from the start.  If the seller has these requirements, so be it, get them disclosed, and out in the open so the offer(s) can be worked by the paties.


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