$5,000.00 Earnest Money?

Question

Hi guys,

I am in the process of negotiating a purchase contract for a house. The verbally agreed upon selling price is 128,000. The seller's brother (a real estate attorney) wrote the contract using standard state forms and also some addenda. I had my lawyer review it and it looks mostly fine with some small changes I have requested.

My biggest concern,m though, is the earnest money. 5,000 seems unusually high for the purchase price - especially considering it took them almost two weeks to get the contract to me after we agreed upon a price. Their lack of responsiveness plus the fact that the house was recently inherited and is (according to them) free of encumbrances, why the high earnest money? I countered with 1,300 as earnest money. About 1,000 is typcial/standard for the puchase price, but I offered a little higher just to show that I am serious about buying the place.

Any thoughts on why they asked or would ask for such a high earnest deposit?

Carlos Flores · Answer

$5k is too much.  Good counter although I may have countered $500 to prove a point.  As for appraisal coming in below sales price, see TREC's 3rd party financing addendum, specifically the VA Notice to Buyer paragraphs under section D.

Mark Reynolds · Answer

So about a hundred years ago I was looking at this property in NE Georgia. Funny little commercial building that had been a sewing shop back when there was a textile business in that part of Georgia. Owned by an old Jewish guy in the rag trade from NYC.

It was an incredibly hard deal to negotiate. I would talk to the selling broker, she would talk to the seller's son, who would then talk to his father, then the son would call his attorney and have a chat, then he would get back to the selling broker then she would talk to me. I'd ask a question and by the time it got through this daisy chain and there was an answer the answer would have nothing to do with my question. It went on like this for months.

One of the items of contention was earnest money. The seller was absolutely adamant that the earnest money had to be 20% of purchase price and that this was the universal custom and that anything else was a deal killer. I said I thought this was crazy and that I'd never put up so much earnest money in my life and yada, yada, yada.

So another thing was how long a mortgage contingency I was going to have. I wanted 6 months which, I acknowledged, was a long time. But the building was vacant, it was a market I wasn't familiar with, it was 800 miles away from my office and I thought I'd need a long time to put this deal together.

So this goes back and forth through the chain of people trying to negotiate this transaction for weeks and weeks more.

Finally the broker calls me up one day and gives me the number for the sellers attorney and says I should talk to him direct. "Wonderful," I think to myself, "at least I can get rid of the daisy chain and either finish this deal or walk away."

I call up the attorney, who was in Atlanta. After some preliminary banter he says "Well, Mark my main objection is this contingency period. Six months doesn't look like a contingency period to me, it looks like an option and I think you ought to give up some of the Earnest Money as an option fee if you don't go forward."

So I'm all ready to say, "Could be you are right but it's not happening." but I pause a little and he continues,

"On the other hand, we've been going back and forth on this for 4 or 5 months already and no other offer has come in so maybe my client is not damaged that much by taking it off the market for 6 months."

I responded, "Hunter, I have bad news for you-- I don't think your client has been exactly forthcoming about the nature of this property."

"What? What? you think my client is lying to me?" (He's very concerned).

"No, not exactly that. See this property has been listed with the largest real estate brokerage in the county for SEVENTEEN YEARS and as far as I can tell I am the first serious offer."

There is a long pause on the other end of the phone. . . "No problem you can have your 6 month free look"

So I looked, decided it was too far away (in the meantime I had met the woman who is now my wife and commuting 1600 miles round trip for a project looked a lot less attractive). I said I didn't like the deal and they refunded the EM.

Given the appraisal and the hardball on the EM I think I might say, "You know what: I think I'll take a pass on this for now. Why don't we talk again in say, six months or so and if I haven't found anything else maybe we can move forward then."  My guess is that you will get a price reduction and lower earnest money pretty quick.

Robert Adams · Answer

Brian Hoyt Good luck with your negotiations! Keep us posted!

James H. · Answer

Thanks Robert Adams,

Good points. This is not a short sale. This is a FSBO and the seller's brother is a RE attorney. I have a hard time believing a RE attorney to be clueless about typical earnest money amounts...Anyway, I attribute it to him attempting to overbuild the contract the same way I, as a foundations engineer, would overbuild my personal foundation if building a house.

I countered with a lower earnest money (1300) and some other things. The seller apparently agrees to the terms without any heartburn and I am awaiting a revised contract for review either tomorrow or next day.

Robert Adams · Answer

Brian Hoyt what type of sale is this? Short sale?

If it is a short sale and you could potentially be locking up the EMD for months while they negotiate with the bank then I would counter them and tell them you request a lower EMD for that reason.

If it is not a short sale I would be more inclined to agree to the higher EMD and negotiate a lower sales price in exchange.  This would lower your total out of pocket expense for this property and your EMD would only be tied up until you close. Since your due diligence period would most likely start right away you could cancel within the due diligence period and get all $5k back.

Either way they may be unaware that $5,000 is way higher than normal and it should be brought to their attention.

James H. · Answer

Thanks Rob,

Yeah, you are correct with everything you've said and the contract is contengint upon financing. There will be another appraisal, so hopefully it comes to more or at least close to the one they had done recently. I replied that 5000 was unusually high and counter offered for earnest money of 1300 and some other changes related time of possesion. One concern I have is that if the appraisal comes in low,/i want the option to re-negotiate the price without risk of being put in the position of paying the deficiency or loosing my earnest money. I don't know if that is possible, but I don't need to be laying out 5000 to risk of loss in any case.

Now I just need them to hurry up and get the contract back to me so we can sign it and lock in our interest rate. Hopefully they don't get in their own way of selling the house to me...

Rob K. · Answer

Brian,

In my area, $1,000-$1,500 would be typical. Maybe less for VA since there is usually nothing down. In my market, the offer is always contingent upon getting a mortgage. If your mortgage was denied five minutes before the closing through no fault of yours, your deposit would be refunded. Not sure how it works in TX.

I would probably call this guy and let him know that you're a serious buyer, but $5,000 is an absurd deposit and see what he says. Also, that appraisal that they had done is probably worthless. Your lender will require their own VA appraisal.

J Scott · Answer

Brian -

It's possible that they just believe there is more security in a large EM, given that they'll keep it if you can't complete the purchase after your due diligence is up.  Perhaps their attorney is telling them that it's better to have more EM, and they don't recognize that $5K is a lot more than typical.

Not saying that's the case, but just trying to see it from a possibly more benign perspective.

James H. · Answer

Thanks Cody. I understand all that. I am just wondering if there is some typcical compoent of a deal that would cause a seller to deviate so much from what is generally understood by local agents and attorneys as a typcial/standard amount (about 500-1000 in this case).

I am guessing they just sent it up the flag pole just to see if I would accept it - but I will not. They need to be more reasonable.

Cody L. · Answer

The EM, and the terms around it (when it's given up) are all negotiable terms just the same as the sales price.

I've gone up and down on the EM and option period in exchange for changes in sales price (meaning, I'll offer LESS sales price but a high EM that is "hard" day 1).   Or if they want a higher sales price I'll do less EM that doesn't go "hard" for weeks or longer).

If you feel it's too high, tell them.  A "standard" (if there is such a thing) is ~1%.  So a $128k should be maybe $1,500 at most.   But more important than the amount of EM is the OPTION FEE (I'd rather have a $500 option fee and no EM than $100 option fee and $10000000 EM), and the TIMING surrounding when you give up the EM

$5,000.00 Earnest Money?

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