Protecting your earnest money - as the buyer, how far should you go?
Earnest money is designed to solidify the deal between you and the sellers. It shows you are serious and should give the sellers enough confidence to remove their home from the market just for you.
Earnest money is also the primary "remedy" for the sellers should you default on the purchase. After all, if you default, undoubtedly they will incur expenses and experience the opportunity cost of not having the home available for other potential buyers.
Even so, as a buyer, it is a simple thing to protect yourself from loosing your earnest money should your existing home not sell or for any other reason that you feel is necessary. Stipulating in the offer that, if something either does or does not happen, the buyer is entitled to a full return of earnest money is the way to do this. For example, you can stipulate that, should you not be able to sell your home that you currently own, the sellers will return your earnest money in full. There are limitless numbers of contingencies that you can stipulate in order to ensure your earnest money is returned to you in the event that one of the stipulations either occurs or does not occur.
With all that said, let's talk about the downside of placing contingencies on contract. You, as the buyer, are interested in maximizing the advantage of your position; but, the sellers are also interested in protecting their position by ensuring that they receive the best possible terms and conditions. If the sellers have an agent, as most sellers do, and if that agent is doing his or her job, there will be quite a lot of resistance built into any presentation of contingencies beyond those which are typical for a particular market.
In the Charleston market, typically contingencies include: "contingent upon a satisfactory home inspection"; "contingent upon financing"; and, "contingent upon satisfactory results of a termite inspection". Many other contingencies are used but these are the ones you will see most frequently. In a market like ours where home sales remain strong, although not as strong as previous years, sellers are reluctant to accept any more contingencies than are absolutely necessary.
Once sellers accept any offer, they are precluded from accepting any other offer even if the follow-on offer includes more favorable terms. If they accept an offer with the contingency that the buyer will be able to back out if the sale of the buyer's current home is not successful, the sellers are, in effect, placing the fate of their own closing on whether or not someone else's home closes. Usually, the sellers have no knowledge about the probability of the success of that happening as they have no way of knowing anything about the other sale. They must go on pure faith - not a comforting situation for someone in need of selling.
Plus, they have now removed their home from the market so that other buyers - without contingencies - or buyers who may offer a higher price or other more favorable terms will be unable to purchase the home. Each day that passes, the seller is responsible for all associated expenses for the home. Of course, this is obvious yet many buyers don't take these seller expenses into consideration when they ask sellers to accept contingencies that could delay a closing.
Certain contingencies have a much higher risk to the seller. A contingency based on the sale of a current home is one of those contingencies that does have a high risk. If you extend this out to the ridiculous, think about how this contingency can interfere with a large number of sales simultaneously. If each closing is made contingent upon the sale of another home, and you have a chain of closings tied together with that same stipulation, the failure of one of those multiple closings could result in numerous closing failures as each could be dependent on the other - like a row of dominoes. These situations are rare but they do exist.
From your own perspective, would you want to take an offer on your own home from someone who is not confident enough about the sale of their home to put their earnest money at risk? Would you even want to accept a contract contingent upon the another sale even if you were guaranteed the earnest money as a remedy? I would not if it were my home.
From the standpoint of negotiating to get the best terms for you as a buyer, the more earnest money you offer, the higher the probability that we will be able to negotiate better terms because the seller interprets the higher figure as a higher level of seriousness and a greater degree of confidence on your part that you will be able to go through with the sale. This is true even if you work very hard to protect your earnest money with proper contingencies. Human psychology plays into this as the seller sees a larger number and draws predictable conclusions.
My advice, when it comes earnest money, is that if you really want a certain home, offer a strong earnest-money sum and invoke the minimum number of contingencies necessary to protect your position. If the home you are vying for is a good buy, expect to have competition from other buyers who will also be offering a mix of earnest money and contingencies. If you want your offer to be accepted, find a way to make your offer more appealing than those you are competing against. Offering a higher contract sales price is only one of many strategies to achieve this. Balancing earnest-money and contingencies can be just as salient.
Chris DeLoach, MEd, MAT, ABR, BIC - Realtor
Accredited Buyer Representative - Real Estate Buyer Agency Council
Broker-in-Charge, House Plan Realty, LLC - Charleston, South Carolina
843-270-1272 Toll Free 877-773-9270
Chris@houseplanrealty.com
www.searchSChomes.com