Buying a home is, for many of us, the most substantial, single investment we'll ever make. The procedures and intricacies of buying and selling real estate can impact the successful transaction. It is important to understand the purpose of earnest money and how it will be handled during the transaction. this is usually spelled out in the offer to purchase or sales contract.

therefore, you should always read the contract or offer to purchase before paying any money and consult your own attorney if you do not understand the purposes and disposition of any payment or any other terms of the contract or offer.

Q. What is "earnest money?"

A. It is money you give to the seller (or the seller's agent) to show your good faith when making an offer to purchase the seller's property.

Q. Do I have to pay an earnest money deposit to have a valid contract?

A. Although no law requires it, sellers typically do require it. If you agree to pay earnest money but do not make the required payment or your earnest money check "bounces", you will probably be cosidered in breach of the contract.

Q. How much earnest money should I pay?

A. The amount is negotiated between you and the seller. It is typically a small percentage of the purchase price and can vary depending upon local market conditions, the price of the property, the type of property (e.g. vacant land, existing housing, or new construction), whether cash advances to a builder or seller are involved, and other factors.

Q. What happens to the earnest money before closing?

A. The purchase contract governs where earnest money will go. It should also specify the amount(s) to be paid, when the payments are to be made, whether the money will be held in a trust (escrow) account, who will hold it, whether it will be credited against the purchase price at closing, and what may happen to it if the transaction does not close.

Q. Will my earnest money earn interest between contract and closing?

A. Probably not. Most earnest money is held by real estate brokers in a non-interest bearing trust or escrow account. In order for the money to earn interest, the buyer and seller must agree, and they must also determine who will earn the interest. Such an agreement should be included in the purchase contract and may require the assistance of an attorney to prepare. Additionally, if a broker is to provide a trust or escrow account that will accrue interest, it must be approved and information provided to the real estate commission, who has jurisdiction over broker real estate trust or escrow accounts.

Q. Who can hold earnest money?

A. Any person (or entity) agreeable to you and the seller, but usually a licensed real estate broker. As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close (due to the seller's death, divorce, bankruptcy, judgment liens, receivership, fraud, tax liens, title problems, etc.). Consequently most buyers prefer to have real estate agents or attorneys hold the earnest money deposit. Since they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used. Title insurance companies can also hold earnest money on behalf of buyers and sellers in their trust or escrow account.

Q. Under the standard Real Estate Purchase & Sale Agreement, who holds the earnest money?

A. The form permits the parties to select who will hold the money -- typically, the listing firm, or the selling firm. Whenever a licensed real estate firm or agent holds any esrnest money, it must be deposited in a trust or escrow account until closing. However, if any addenda are used with the form, check to see whether they conflict with any provisions in the form concerning who will hold the earnest money or other pre-closing deposits.

The standard for "RE-21 Real Estate Purchase & Sale Agreement " is a well-known and widely used form adopted by the Idaho Association of REALTORS® (which is a copyrighted form).

Q. Is earnest money the same as an option money or fee?

A. No. The "Option money or fee" is a separate fee the buyer may choose to pay under an agreement to purchase an Option for the property. While earnest money may be refunded under certain circumstances, the option fee is nonrefundable.

Q. What if the standard contract form is not used?

A. Many developers, builders, employee relocation services and lenders' asset managers use thier own sales contract forms. Generic contract forms are also commonly available and can now be found on the Internet. Many will require you to make an earnest money deposit or similar deposit, but they may differ from the standard Real Estate Purchase & Sale Agreement (which is a copyrighted form) that contains inspection and repair provisions, title requirements and other protections, but there may be no provision allowing you to obtain a refund of the earnest money under any circumstances. Therefore, you must read every contract form carefully and consult with your attorney if you have questions.

Q. If a contract contains a rescission ("cooling off") period, can I get my earnest money back if I cancel the contract during that time?

A. Possibly. However, most purchase contracts do not have a recission period. Only in certain kinds of transactions will you be allowed (for a limited time) to cancel the contract. These transactions include developer offerings of condominiums, time-shares, and interstate land sales; and where a seller fails to give you certain disclosures in a timely manner, including the "Seller's Property Condition Disclosure" and (for properties built before 1978) the "Lead-based paint & hazards disclosure". These recission rights are usually created by state or federal law. The amount of time varies, but it is typically only a few days. If you are securing a home equity or 2nd mortgage to help with the purchase, you may have a right of rescission for that loan. The standard purchase mortage or 1st mortage does not have any right of rescission. You should consult your own attorney about rescission rights in your transaction.

Q. Isn't there a federal law that allows me to rescind my home loan and get my earnest money back?

A. No. Although there is a federal law that gives you three days to cancel certain home loan commitments, it does not give you the right to cancel a purchase contract and get a refund of your earnest money. Your obligation to purchase as set forth in the sales contract is unrelated to your right to obtain the best possible loan or avoid a loan that has hidden conditions. Even if the sales contract has a financing contingency clause (such as the one found in the RE-21 Real Estate Purchase & Sale Agreement), your cancellation of an approved loan is not one of the conditions that would release you from the sales contract.

Q. Under the standard purchase & sale agreement, do I get my earnest money back if the transaction does not close?

A. It depends on why the contract isn't consummated. For example: the standard contract typically includes various conditions and/or contingencies which must be met for the contract to proceed. These may include the requirement that you make a good fiath effort to obtain necessary financing or to sell your own property; or that the seller make certain repairs and provide goo title. If the seller does not meet his requirements, you may be entitled to a refund. On the other hand, if you breach the contract, you may forfeit the earnest money deposit. The party injured by the breach may also seek additional damages or try to enforce the contract by asking for "specific performance" where a court is asked to compel the breaching party to perform their promise--either to purchase or to sell. If your purchase contract does not close, you should consult your attorney over the remedies that may be available.

Q. What if the contract fails and the seller and buyer cannot agree on who is entitled to the earnest money?

A. According to the terms of the standard purchase and sale agreement and the rules governing real estate brokers, if there is a dispute between buyer and seller over the return or forfeiture of an earnest money deposit, the broker holding the money must continue to hold the funds in trust until buyer and seller resolve the dispute in writing or until a court decides the matter (less than $5000, small claims court; mor than $5000, usually District or Superior Court, although some cases may go to federal court). The parties may also resolve disputes through voluntary or court ordered mediation. If no one institutes a proceeding within a state specified time frame, then the funds are deemed unclaimed and delivered to the State Treasurer's Office as Unclaimed Property. If an attorney for you holds the earnest money, the attorney must hold or dispose of the funds in accordance with the rules of the Idaho State Bar. When a form other than the standard purchase and sale agreement is used, it may allow the seller access to the money whether or not the closing occurs as scheduled. In any event, while a broker is not allowed to pursue a claim for earnest money for buyer or seller, the borker may appear as a witness in court.

Information provided herein was obtained from real estate brokers law, contracts used in real estate transactions, etc. . The answers to these questions are for information purposes only. Your particular purchase and sale agreement or sales contract contains terms and conditions that may vary from those discussed. Consult your attorney for specific advice regarding your legal rights, and consult with your real estate professional when selling or purchasing a home.

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