Legal FAQs for REALTORS®
— Contracts and Forms
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? (Updated March 4, 2016)
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.
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? (Updated Oct. 13, 2014)
TREC Rule 535.146 requires that unless a different time period is agreed upon, any trust money, including earnest money received by the broker, must be delivered to an authorized escrow agent 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.
My client’s contract to sell his home fell through, and the buyer and seller disagree over who is at fault and who should get the earnest money that was deposited with the title company. Now my seller wants to put the property back on the market even though the earnest-money dispute hasn’t been resolved. What should I do? (Updated June 30, 2014)
Since the parties haven't agreed on the termination of the contract and no judge has decided the issue, you shouldn't give either party advice about the termination of the contract. Tell your seller to get advice from his attorney concerning the risks of proceeding with a subsequent sale of the property without a final settlement of the issue of contract termination.
The seller's primary goal should be to have formal termination of the contract. That ensures he can put the property back on the market and sell it to someone else without risking a lawsuit that could stop a subsequent sale of the property.
A contract can be formally terminated if both parties agree to terminate—usually in writing with a release-of-earnest-money form—or if a judge orders the contract to be terminated. Because of the potential risk of an adverse ruling by a judge concerning the seller's right to terminate the contract, title companies often refuse to open a second escrow file on a property where the first contract has not been formally terminated.
Remember that Texas Real Estate Commission contracts now require buyers and sellers to participate in mandatory mediation to resolve disputes before going to court.
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