Is earnest money required to make a contract effective?

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A woman in a orange shirt signing a check.

09/30/2014 | Author: Editorial Staff

A listing agent told me he wouldn’t present my client’s offer to his seller until I sent him an earnest-money check. He says the earnest money is necessary for the offer to become a binding contract should the seller accept my client’s offer. 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.

Read more legal FAQs on texasrealestate.com.

Categories: Legal
Tags: legal, earnest money, contract


Comments

Alexander Landman on 05/26/2016

What about the execution? if the contract is accepted but not executed and sent to the title company that misses the fact the contract was not executed is it a valid and binding contract ?

linnie on 01/06/2016

who is answering these questions is clearly confused.
You are confusing otion money and earnest money and something luming them together.
The are totally seearate as otion money must be in the hands of the seller and non refundable within 3 days.
It never goes to the title company.

James higgins on 09/15/2015

Seller has earnest Money unabaile to meet deadline can seller keep money

tim sweeney on 10/29/2014

Shubra,

Did you say that the buyer DID deposit the option money with the title company on the 4th day? But the title company never got the contract?

Shubhra on 10/29/2014

We had a property under contract last month but it fell out before the option period ended. The buyers did not deposit the option money or EM till the 4th day. My understanding is if option money is not deposited and receipted by the seller/LA,the buyer looses EM. But in this case,the title company said,since there was no executed contract delivered by the buyer to their office,the title company did not call the LA to receipt pg 9 and since no EM was delivered the buyer, they do not owe any money to the seller even if option money was never delivered with in stipulated time described by TREC. No contract no money. My seller was very frustrated.

A. K., Texas Licensed Real Estate Broker (TREC lic on 10/02/2014

The (ahem!) editorial staff states that “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.”

Of all the Codes of Ethics flying around, an agent may be in violation by not presenting ALL offers, notwithstanding, the client’s direct order to present only certain offers.  What agent would not present a cash offer with a premium over asking price to close in 7 day without earnest money or option fee although in direct violation of the seller’s directive?  Oh, then watch how fast that seller sues his agent.  You don’t have to believe me, just check case law.

Morris "Bill" Austin on 10/02/2014

CT,
At best your client may get the option fee not the earnest money.
Likely not worth the bother.

Roberta on 10/02/2014

Take option$ for 14 days. First
15th day if inspections are complete and no issues need negotiations, then proceed with earnest $$ check to the title company

Alexandra Fincher on 10/02/2014

My thoughts are that some of these statements sometimes are contradictory.  I think that contracts should be written for layman to understand and still be effective.

Laura O on 10/02/2014

The language about earnest money in the updated TAR forms is quite vague: “Upon execution of this contract by all parties, Buyer shall deposit $XX as earnest money with Title Co , as escrow, agent, at (address). ...If Buyer fails to deposit the earnest money as required by this contract, Buyer will be in default.” One could read this that the buyer would immediately be in default as soon as the contract was signed… I suppose that doesn’t matter all too much as default probably (?) doesn’t become a huge issue until after the close date, but are there any guidelines on how soon it needs to be deposited? Thanks.

Virgil Eaves on 10/02/2014

I think some clients should write if off and feel fortunate that a deal went south early on.  Clients are often very lucky that a contract didn’t drag out over months until the buyer eventually finds a legitimate way to bail.  I’ve always believed in never looking back, always looking only for the solution, not for a fight.  Holding someone’s feet to the fire generally results in burnt fingers.  It served me well for 37 years in the profession during which I never had to testify, never had to accuse anyone, never had to defend myself, clients or customers before a judge or mediator.  In a fight, the only sure winners are the lawyers

tim sweeney on 10/02/2014

I don’t change a listing status to “pending” until I get the option check. Because some agents can and will submit offers on more than one property at a time. I even had the experience where the buyer STOPPED PAYMENT on her $100 option fee check after we had accepted her offer and deposited her check. And that particular buyer was a licensed Texas Real Estate Agent. My seller is still upset about her doing that to this day. I can’t blame him.

Ernesto G on 10/02/2014

Your client will be wasting his money on attorneys fees. What damages could he have sustained in one hour. Was there an termination option fee paid and for how many days? This should most likely cover the right to cancel.

Marion Blankenship on 10/01/2014

Real estate schools teaching Law of Contracts teach that the “consideration required” is and can be “a promise exchanged for a promise”.  In other words, buyer agrees to buy and seller agrees to sell.  NOT re:  earnest money

ct on 09/30/2014

This is so ironic because last week I executed a contract, and a hour later before I could even received the earnest money from the buyers agent,  the buyer canceled the contract.  My seller would like the earnest money for liquidated damages before he terminates the contract.  The agent tells me that he does not have the earnest money, although he sent me a copy of a blank money order.  My client is furious and will seek legal action.

I don’t feel comfortable executing a contract without earnest money at title.


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The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.

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