When earnest money must be deposited

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11/23/2016 | Author: Editorial Staff

I’m representing the buyer in a transaction. He gave me his earnest money check, and now the contract is fully executed. When do I have to deposit the earnest money with the escrow agent named in the contract?

TREC Rule 535.146 requires that unless a different time period is agreed upon in writing, any trust money, including earnest money received by the broker, must be delivered to an authorized escrow agent (or deposited in a trust account) within a reasonable time. The commission has determined “a reasonable time” to be not later than the close of business of the second working day after the date the broker receives the trust money.

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.

Since you have the buyer’s earnest money check, you should deposit it as soon as possible to ensure that your buyer is not found to be in default for failure to deposit the earnest money in a timely manner.

Categories: Legal
Tags: legal, legal faq, buyers, earnest money


Comments

Carl Pfeiffer on 11/28/2016

David Davis:

You settled the debate via the TAR attorney. 

Consideration - is a legal concept that describes something of value given in exchange for a performance or a promise of performance.

Earnest Money is a performance item, therefore it is consideration as I have maintained earlier.  I am not an attorney, but my father and grandfather were attorneys who owned a title insurance company, and several title companies.  I was a title examiner learning from some of the best for over eight years, and a licensed realtor for over thirty years.

David Davis on 11/28/2016

Just spoke to the TAR Attorney.  Earnest money is a performance item.  It however, is not “time is of the essence.”  Therefore, if the parties wind up in court, and the seller tries to claim that the buyer did not perform on time, the judge will likely toss the case out, as the buyer did perform in a reasonable time.  He also indicated that the next contract revision could likely see some changes to paragraph 5 of the 1-4 & Condo Resale Contracts.

David Davis on 11/28/2016

Carl Pfeiffer,
I agree, we are spliting hairs here, but my question to you earlier remains unanswered.  Are you an attorney?  Further what are your qualifications to make the statement that you made “Legally, any (binding) contract must have consideration (i.e. Earnest Money) to be valid, unless specifically stated otherwise.”  My questions are valid, and give reasonable cause to the conversation.

Your response of: would I advise my seller client to accept an offer with no earnest money envolved is perhaps one of the oldest lawyers tricks there is, answering a aquestion with another question, and is further a non-responsive answer.  Please answer my questions.  We are not addressing if or not I (or anyone else for that matter) would advice a client to accept or decline an offer with or without earnest money in it, we are discussing if the offer is valid without earnest money in it.  Again, please, a direct response.  Are you an attorney, if so, the one I found on line in San Antonio? Finally what case law are you basing the validity of a contract needing earnest money to be considered valid or for the earnest money to be considered “consideration” or “valuable consideration” which is typically not required until CONVEYANCE not CONTRACT.  Again, capitals for action not yelling!

Carl Pfeiffer on 11/28/2016

Strictly, legally defined, earnest money IS NOT consideration, nor is it required in a real estate contract.  On that point I agree.  Regarding real estate contracts, in accepted practice, I maintain it has become a form of consideration.  Earlier, I stated my case that earnest money “REPRESENTS” all three aspects of a contract.

Again, I ask the question.  Would you accept a real estate contract WITHOUT earnest money?  Over forty plus years, I’ve never seen a real estate contract that did not include EM as a condition of the offer.

EM is the only form of protection or recourse a seller has in the contract, lawsuits aside.  It is offered as a form of consideration representing that buyer is earnestly seeking to purchase the property.  It also is a form of consideration buyer is willing to grant to seller in the event of performance failure.  Option money is strictly consideration accepted by seller, granting buyer the right to terminate without cause.

We’re splitting hairs in this debate, but I can think of several ways EM could be argued that it has become, or is consideration in real estate contracts.  Carry EM through to final performance and it effectively becomes consideration when credited towards the purchase price.  Carry EM through when courts award it to seller where buyer fails to perform.  Judicially, EM has been affirmed to be a form of consideration in that respect.

Spirit of law is what is being debated here, not whether EM is/is not legally defined as consideration.  I maintain that it is consideration under current usage, practice and interpretation.  To define EM as consideration, would only entangle the strict legal definition of contract law, making it even more complex.  Accepted practice resolves that shade of grey.

Fran Hoover on 11/28/2016

Earnest Money is not “consideration.”

Carl Pfeiffer on 11/28/2016

There are three elements that must be present for a contract to exist: offer, acceptance, and consideration.

Offer - An offer is a written or spoken statement by a party of his or her intention to be held to a commitment upon acceptance of the offer.

Acceptance - In order for an acceptance of an offer to be effective, it must be made while the offer is still open.

Consideration - is a legal concept that describes something of value given in exchange for a performance or a promise of performance.

Earnest money represents all three aspects of the offer.  It is part of the offer as the buyers earnest consideration to perform.  It is an inducement to the seller to accept the offer if buyer fails to perform.  It is something of value given in exchange for the promise of performance.

Technically, Earnest Money is NOT a required part of a contract, but is an accepted practice in real estate contracts.  How many sellers would be willing to accept an offer without an EM deposit?  Would you advise your client to accept an offer with no EM?  Seller is agreeing to take the property off the market in exchange for the consideration of EM if buyer fails to perform.

Option money (consideration) is the right for buyer to withdraw from the contract for any or no reason.  It is NOT a required aspect of a contract.  Real Estate contracts are specifically written to protect the buyer, not the seller.  All contracts are designed/written to follow the principle of “caveat emptor” - buyer beware.  Thus, the myriad ways a party can terminate a contract.

Rick DeVoss on 11/27/2016

It is positively amazing how many ‘myths’ are floating around in the real estate community!  ~We are licensed and supposedly educated, people.  Let’s check our facts before we start writing things in public.

When was the last time you took a class about contracts with an attorney as an instructor…??    ~My suggestion is that you need to do so immediately, all of you.

Our TREC forms used to be called “earnest money contracts.”  But if you will take a moment to look at the forms, it does not say that in the title now!  Earnest Money is a psychological myth that makes the seller feel like the buyer is going to perform as stated in the contract.  But if a buyer wants to weasel out of a contract, there are a hundred ways to do so.  —-And still get your earnest money back!

Think about it:  What effect does the “earnest money” have on the performance of the parties DURING the processing of the contract…?  Answer: absolutely none.  ...You may be able to claim that it has a psychological effect on the buyer, but, not only are most buyers smart, but you gotta remember that most of them are represented by an Agent these days, and any agent worth her salt can advise the buyer how to get out of a contract and still get their earnest money back.

Do yourself a favor if you are not sure about any requirement to have “earnest money”:  go to your favorite title company attorney and discuss it with him or her.

Ask them if it is OK to keep the check in your desk for more than 24 hours.  ~If the contract calls for Earnest Money to be deposited, then you do NOT have the right to withhold it until the Option Period is over.  (If you wish to do that, then write it into the terms of the contract, and do it legally.)

It is my belief that every agent needs a go-to attorney.  So make friends with the one that runs the title company that you so strongly like to put in MLS.  ...And if the title company you have been using does not have an attorney on the premises, perhaps you need to find a different title company.  (The one I like has TWO attorneys on the premises.)

Let’s all take a CE class in contracts within the coming few months.
...And have a Merry Christmas and a Happy Hanukkah!

Chip Staniswalis on 11/27/2016

Maybe it’s just me, but it seems like there is some confusion regarding the non-essential component of a valid contract, Earnest Money, and the essential component of a valid contract, Consideration.

David Davis on 11/27/2016

Carl Pfeiffer,
I too would like to know your qualifications and background to make such a statement “Legally, any (binding) contract must have consideration (i.e. Earnest Money) to be valid, unless specifically stated otherwise.”  I have given citing of my statement that there is no requirement for earnest money for a contract to be valid, and all that is required for a contract to be valid is a “meeting of the minds of the parties”.  I see that there is a Carl Pfeiffer who is a licensed Attorney in San Antonio.  I do not know if you are that person or not.  But as I said, I have had Chuck Jacobus who is also an Attorney and the Chair of the Broker Lawyer Committee tell me many times that eranest money is not a requirement for a real estate purchase contract to be valid.  Further, I have had several Judges tell me the same thing.  All that is required is a meeting of the minds of the parties.  If the contract calls for earnest money, it is a “performance item” of the contract.  As for Option Fee.  Without an Otion Fee, there is no Option Period. Period.  If the Option Fee is not delivered within the time required, no Option Period. Period.  Many people seem to confuse “consideration” or “valuable consdieration” within the contract.  There must be consideration at CONVEYANCE this we all know, but there is no requirement for consideration at CONTRACT unless the parties call for it in the contract (document).  I have used capitals to indicate actions here not as a matter of yelling.

Stephen Williams on 11/27/2016

Mr. Pfeiffer, I don’t know your training or qualifications but you bring up a “legality” I’ve heard before that seems to contradict what I’ve been hearing lately.  You say that earnest money is a required consideration to make a contract valid. It’s been explained to me that the option money is the consideration that makes the option (only) valid. So if consideration is a requirement for contract validity, why are others telling me the contract is valid before the $ is delivered? Is the contract valid simply because it “called” for consideration?  That would be odd to me. It calls for signatures, yet we don’t simply assume it will get signed and consider it a contract.

Carl Pfeiffer on 11/27/2016

Latitude, inclusion, simplicity and ease of use are the operational words the Broker Lawyer Committee uses when designing forms for agents to prepare contracts.  The Committee goes to great lengths to design contract and amendment wording that 1) follows the statutory and judicial interpretations, 2) allows a “reasonable” time period to comply with the law and contract terms, 3) to act in the best interest of the consumer (understandable) and sales agent knowledge, and 4) facilitate binding execution of contracts without attorney intervention.

Time periods, “upon execution of the contract” is about as specific as it gets in implied delivery of funds while allowing latitude which adheres to contract law.  Legally, any (binding) contract must have consideration (i.e. Earnest Money) to be valid, unless specifically stated otherwise.  Realtors are legally defined as “fiduciary agents” to assist in the transfer of funds, while escrow agents are defined as the fiduciary for depository and transferor of settlement funds.  Escrow agents CAN provide a GF number in advance for receiving funds, they prefer to have contract specifics available when opening the file.  Agents can facilitate this by working with the escrow agent/title co in advance of an executed contract.

The various ways funds can be delivered are changing, and the Committee is aware of this.  Latitude is allowed by using the mutually inclusive term Earnest Money.  How you get it to the escrow agent is not the important aspect.  Only that it is delivered in a reasonable time period which has been judicially inferred as accepted practice to be within 2-3 days of the execution date.  Agents holding checks in the desk drawer until the option period expires is not a good business practice!  You’re not an escrow agent, and delays the escrow agent/title company from performing the terms of the contract.

Let’s continue to follow the intention (spirit) of the rules of law, both legally defined or implied and keep it simple.  If we digress and include all potential technicalities in the contract forms, we’ll be dealing with thirty plus page 1-4 Family contracts that require attorney assistance, without amendments.  Longing for the past when contracts were only two-three pages long……signs of the times?

David Davis on 11/24/2016

Rick,
I’ve asked this very same question of the Broker Lawyer Committee and they respond with the same answer every time.  “Use the second sentence in paragraph 5.”  They don’t seem the least bit interested in changing that paragraph as there just doesn’t seem to be a need for it in their eyes.

As long as consumers are getting what they want, TREC as rule won’t do much in the way of changes.  Until a lawsuit winds up costing a consumer some big money they likely won’t take action on this because it serves everyone well just like it is.  It effects a desired result, it prevents co-mingling of funds by licensees (provided they do as the contract states), and it typically gets the parties what they want, a successful transaction.

As for the licensees touching every contract they write, I couldn’t agree more.  Half of them have no idea what’s in the documents they are helping clients prepare.  That’s really scary.  Where are the brokers in all this?

Electronic age:  We knew this was coming.  Checks are all but a “thing of the past”.  How will performance funds be handled?  What about the out of town buyer?  All this comes down to technology.  Bank wires.  Title companies have trouble accepting wires until they have the contract so there is a GF number to credit the money to, etc.  There is that momentary gap of time that cannot seem to be filled.  Clearly we have some hurdles in front of us.  I think TREC is going to be forced to work with legislators to allow some changes so that we can move into the 21st century and beyond.

Happy Thanksgiving!

Rick DeVoss on 11/23/2016

Some of the remarks on this blog are quite surprising, especially coming from Realtors.  (I don’t believe the writers are all brand new to the business.)

The topic is Earnest Money.  ~It is not Rocket Science.  It should not take a PhD. to figure it out.  Go back and READ what David posted.  Brokers should insist that all their agents read every word of every contract that they touch.

Basics:
> Earnest Money is NOT required to have a valid contract.
> If the contract calls for earnest money, it MUST be delivered to the escrow agent as soon as the contract is executed.  (Quit quibbling over 2 or 3 days—- just Do it!)
> If your buyer does not plan to do that, you’d better specify something else in the contract.
> It does not say you have to have a “check”.  My last buyer was in New York, and simply wired the funds to the title company.
> If the buyer wants to delay submitting the earnest money until after the Option period, then you must write that into the contract.  ~All actions have to be specified.
> Agents and Brokers had better quit holding checks in their desk drawer.  You are violating TREC rules unless you put it in an escrow account.  ~And that has to be designated in the contract, too.

The phrase “upon execution” implies immediately.  The only way you could do that is to have the contract signed at the title company and hand over the check to the escrow agent on the spot.  ~So maybe it is time for TREC to change that wording, and make the specification more realistic.

I would like to know if there have been any law suits over this topic.  But as soon as we have one, I guarantee you the wording in Paragraph 5 will be changed!

 

David Davis on 11/23/2016

Cary Beach,
It is very specific.  See my prior post that states:
If we examine the RESIDENTIAL CONDOMINIUM CONTRACT (RESALE) TAR 1605 & ONE TO FOUR FAMILY RESIDENTIAL CONTRACT (RESALE) TAR 1601 Paragraph 5 states:

“5. EARNEST MONEY: Upon execution of this contract by all parties, Buyer shall deposit $_____ as earnest money with_______, as escrow agent, at______.
Buyer shall deposit additional earnest money of $______ with escrow agent within _____ days after the effective date of this contract. If Buyer fails to deposit the earnest money as required by this contract, Buyer will be in default.”

That’s about as specific as you can get! Can you think of a more specific set of terms?  I know I can’t!  It says upon execution, or if you use the second sentence in the paragraph the number of days agreed by the parties.  Pretty “cut & dried” “black & white” “plain & simple” and all those other Texas terms we seem to love so much!  Happy Thanksgiving!

Cary Beach on 11/23/2016

This rule should be very specific.  I moved here from Michigan and it was very clear no later than the 2nd business day.

Theresa Akin on 11/23/2016

I really don’t understand all the fuss..  My buyers have always given me a check for the option period and one for the earnest money. If during the option period the deal falls through I just return the earnest money to the buyer either in person or mail. If it moves forward I deposit the earnest money for the buyer, of course with their permission to the title company. Sometimes they will take the earnest money to the title company themselves depending on the size of the earnest money.  Aside from all this that 5pm cut off is ridiculous. Just my $.02!

Danny Steed on 11/23/2016

Earnest money collection/deposit is a growing concern. As a broker for 35 years, I have customarily expected earnest money (checks) to be turned in to my office by my agents, along with a copy of the contract. We then make sure the contract is delivered, along with the earnest money, to the escrow agent (Title Company) ASAP after we receive them, typically within 24-48 hours. Good or bad, this is a long-standing practice in our market, but has worked well for decades. It is becoming increasingly difficult to “round up” earnest money with the advent of: 1) digitally signed contracts with “Earnest Money to Follow” and 2) Millennials and others who don’t have checking accounts and don’t grasp the concept of checks. Earnest money deposits, especially by antiquated checks, is becoming cumbersome. Has anyone developed a checkless or cashless process of depositing earnest money, either through the wiring of funds or debiting of accounts?  As the contract process becomes more paperless and digital, isn’t there a modern way of streamlining this process and getting the earnest money deposit into the hands of the escrow agent immediately upon the executing the contract? Just a thought.

David Davis on 11/23/2016

ERLENE BARKER,

Fair enough question.  The parties can do anything they want.  I got the green light on this from Chuck Jacobus who is both an Attorney and is also the Chair of the Broker Lawyer Committee for TREC.  By green light it does not negate the contract or interfere with the intention of the contract or that paragraph, and it accomplishes the desired result.

Stephen Williams on 11/23/2016

Perhaps a lawyer reading this can answer.  I understand that the earnest money is a “performance obligation”, and heck, I might even understand what that means.  What I don’t understand, is why?  Why doesn’t the law say that, when/if earnest money is called for in a contract or offer, that the delivery of same is a requirement to make the contract valid?  I’ve been spending my valuable free time trying to imagine the scenario where either party would want there to be a binding contract after establishing that a buyer either can’t or won’t deliver earnest money.  I suspect that those with more experience than me can concoct some rare scenarios, but should those dictate what prevails as law?  Enlighten me, holders of infinite knowledge and wisdom.  Happy Thanksgiving all!

ERLENE BARKER on 11/23/2016

I thought you could not mark out things on a contract promulgated by TAR? The second part of the paragraph is for additional funds and like I said I didn’t think lining through any of it was allowed?  Am I wrong? Thanks for any help or comments.

Rick DeVoss on 11/23/2016

From my experience, the second sentence in Paragraph 5 is not often used by most agents.  ~Perhaps it is the use of the word “additional” that steers them away from it.
But what if the buyer said “let’s cross out that word…”...?

Let’s remember that it is not called an “earnest money contract”.  The contract can be valid without having any earnest money on the table.  ~So, you could put a “zero” in line one, and use the second sentence to specify the amount of the earnest money to be delivered at a later date.  ~...Such as when the Option Period is satisfied.

Why would a buyer want to tie up his earnest money when he has the right to terminate under the Option Period…??  ...It is too much of a hassle to get it back from some sellers.  The contract wording gives buyers so many ways to walk anyway, that I am not sure of the ‘value’ of earnest money.  ~It seems to protect very few sellers.

David Davis on 11/23/2016

Rick,
1. Yes they are.
2. Good morning, and if we don’t get to talk agoing before, Happy Thanksgiving my friend.
3. Yes, Agents that accept the responsibility of handling money do so at great risk.  I do it from time to time, but when I do, I make certain that that money is in the hands of the escrow officer or seller/listing broker (if option fee) within the hour of it coming into my possession, and I get a signed receipt for it.

If a weekend or holiday is coming into play I like to recommend the use of the second sentence in paragraph 5.  Maybe you can chime in on that…..  I had Chuck Jacobus give me the green light on that trick before recommending it.

Rick DeVoss on 11/23/2016

Comments are flying back and forth so fast today that the posts you see below are not published in the order in which they were written…

Rick DeVoss on 11/23/2016

David > Perhaps you would like to explain your comment.
The contract says that the buyer shall deposit the earnest money with the designated escrow agent “upon execution of the contract.”
Perhaps agents need to be careful how they assume that responsibility for their buyers.  Either take it to the escrow agent immediately, or let the buyer do it.

Chip> Your statement does not make sense.  Not sure what your training is as a title company employee, but as a Realtor, you should have read Paragraph 5 of the TREC contract   It clearly states that the buyer shall deposit any agreed upon earnest money with the agreed upon escrow agent.  ~Are you aware that the title company maintains an escrow account?
I suspect that your post does not come across saying what you meant to say.  Perhaps you can enlighten us…

David Davis on 11/23/2016

If we examine the RESIDENTIAL CONDOMINIUM CONTRACT (RESALE) TAR 1605 & ONE TO FOUR FAMILY RESIDENTIAL CONTRACT (RESALE) TAR 1601 Paragraph 5 states:

“5. EARNEST MONEY: Upon execution of this contract by all parties, Buyer shall deposit $_____ as earnest money with_______, as escrow agent, at______.
Buyer shall deposit additional earnest money of $______ with escrow agent within _____ days after the effective date of this contract. If Buyer fails to deposit the earnest money as required by this contract, Buyer will be in default.”

Nowhere in this paragraph does it say “reasonable time” or “the close of business of the second working day after the date the broker receives the trust money”.  It says “upon execution”.  That means when all parties have signed the contract.  Unless the parties are using only the second sentence in the paragraph, and striking the word additional (I’ve seen this done to create some additional time to get the money to escrow especially if a weekend or holiday is coming into play) the earnest money must be deposited upon execution of the contract.

David Davis
REALTOR®

Melissa Chavez on 11/23/2016

D. Davis- & Chip- it is written in contract that buyer deposits money.  Paragraph 5.  We agents have mostly always obtained the check for the buyer-client and handled it ourselves.  I have seen a trend where the buyer goes directly to the title company and/or handles the deposit of EM themselves.  All parties are then provided a EM receipt.

It had been my understanding for a long time now, that It has always been understood that there is no “deadline” for desposit of EM, and timely is usually within 2-3 business days.  EM deposited is in good faith as part of consideration and in addition to the accepted contract. 
I am a supervising Realtor with my firm and train my new agents in this regard as well.
Happy day all!!

Rose Riggan, Your Working Realtor on 11/23/2016

As a local Texas Realtor, doing business for 10 years.  I have had 1 buyer take the
earnest money directly to the Title company.
I agree it’s usually within 2 days or less!
Your Working Realtor,

David Davis on 11/23/2016

This is not what is written into the contract.
TAR You blew it on this one.

Chip Staniswalis on 11/23/2016

As a Realtor and a title company employee, I’ve never heard/thought about a Buyer depositing earnest money. I wonder what would make him want to do that, and if the broker does not manage an escrow account, in what escrow account would the buyer use? Would it have to be an acceptable account to the seller?


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