Ask Phyllis!

Earnest Money Deposits

Dear Phyllis,

My daughter and her husband have been looking at La Crescenta homes on and off for about six months. They are now serious buyers.  They are working with the real estate agent who sold us our home.  Their first offer was a fiasco.  Our Realtor® advised us to have tight contingencies: seven days for the inspection, fifteen for the loan and ten for the appraisal. They offered a 3% deposit on an $852,000 home which was listed at $835,000. From what we were told there were several offers and the seller countered us that they wanted a $50,000 earnest money deposit.  Our Realtor® advised that this was unreasonable and that a 3% earnest money deposit is customary in the Foothills.  They didn’t agree and the seller sold the home to another buyer.  In retrospect we are wondering if they should have offered the increased deposit?  Looking back

Dear Looking back,

I have been selling real estate for nearly thirty years and this is a first. Most purchase contracts elect deposit issues be handled by mediation and arbitration. In this instance the buyer cannot be liable for damages exceeding their deposit, which is customarily 3% of the purchase price. Thus, there is no need for such a large deposit.

In competitive situations I have seen buyers offer larger deposits, but I have never had an instance where a seller demanded more than 3%. Escrow is an independent neutral third party. Once your deposit is transferred to escrow it can only be refunded to you by one of three ways.  The manner is determined in the  purchase contract:

1) Buyer and seller signed (escrow)

     cancellation instructions stating

     the deposit is to be refunded

2) Mediation/arbitration

3) Court order

Your real estate agent is correct, this was unreasonable.  Fifty thousand dollars is nearly double the standard (customary) earnest money deposit.  Assume your daughter cancelled escrow after their physical inspection.  If the seller were not cooperative it could be months before she and her husband were refunded their deposit.  This could have impacted them bidding on another home and being able to close escrow.  Best of luck to your daughter and her husband on finding a better home with a more reasonable seller.

  Phyllis Harb