What Is Earnest money and Is It Refundable?
Jul 27, 2020
In some areas of the country, a potential buyer might give the real estate agent a small sum of “earnest money” or a “binder” to show a good faith intention of moving forward with the deal. This is not common in Brooklyn. Here, agents do not maintain escrow accounts and sadly, a handshake is not sufficient to bind the parties to a real estate deal in Brooklyn. A law called the statute of frauds requires that real estate contracts be in writing and signed to be enforceable.
If you’ve made a verbal offer in the city, but been asked to give “earnest money,” inform the seller’s agent that you intend to proceed quickly and get your lawyer involved. Let them know you want to get whatever inspections are needed and have the pre-contract inquiries done. There is no reason to give a binder.
However, if you have already, rest assured that it is not generally enforceable. If it comes to it, you can get a refund or probably just get your original check returned. (Do not give cash.)
When is a Deal ‘Enforceable?’
To put it simply, it’s only a done deal when the seller and buyer both sign the contract and the contract is returned to the buyer’s lawyer.
Here in New York, “going to contract” involves the buyer submitting a check for 10 percent of the purchase price as a “contract deposit,” to be held by seller’s lawyer once the contract is fully signed. (Note that it is sometimes less than 10 percent.)
Can You Get a Refund of the Contract Deposit Once It’s a ‘Done Deal?’
While there are some loopholes, there are really only a few scenarios that might allow for ths:
- If a contract is subject to the buyer securing a mortgage but the bank’s appraisal comes in significantly under the purchase price, it’s possible the bank will not loan the amount of mortgage specified on the contract. In this case, you can get your contract deposit refunded. (Note, however, if the buyer intended only a small loan, say 50 percent of the purchase price, and the bank would still loan the intended mortgage, then the deal can go forward and there is no loophole.
- If the bank declines the buyer’s loan , the buyer generally gets their contract deposit returned. Make sure your realtor is looking out for a recent technique wherein sellers slip in legal language ensuring that a deal be “not contingent on financing.”This means that even if you are denied a mortgage, you cannot get out of the deal—YIKES.
- If the co-op board turns down the buyer, the contract deposit is returned to the buyer.
- If a co-op board issues conditional approval (i.e., demanding that the buyer deposit a maintenance escrow equal to two years’ worth of maintenance), the buyer can get out of the deal and get their contract deposit refunded.
- If a condo board fails to issue the “waiver of first refusal,” the buyer gets their contract deposit returned.
- If a co-op board has not issued its decision by a certain date, the buyer can get their contract deposit refunded. (Prepare for a long wait on this one, though…)
Before you hand over a single cent, make sure your lawyer has looked over the terms.