One of the most misunderstood items in a contract to purchase a home is earnest money. It baffles, confuses and bewilders buyers and sellers, especially when the process doesn't go as planned and the parties involved can't agree to terms for consummating a contract.
In detail, instructions are given anticipating a variety of scenarios that could occur which specify the disbursement of the money and who's responsible for its safe keeping pending resolution.
The majority of confusion emanates from the fact that other parties or intermediaries are involved in this transaction, which distinguishes it from the common everyday sales and purchases we're accustom to. For example, if this morning I go to the bakery and buy a dozen jelly donuts, I do so directly by asking the counter person for a dozen jelly donuts, paying her directly and leaving immediately with purchase in hand.
While this scenario is possible and does occur in real estate, it's for most of us the exception rather than the rule.
When forming a contract to purchase residential real estate, a sum of money is offered in good faith and "shall be deposited by ________ upon acceptance of this contract in a trust account pending closing." For most of us, that trust account is a provision that requires more in-depth analysis and discussion (trust me).
By law, all real estate brokers representing buyer or seller are required to have a "trust account" into which monies are deposited, held and disbursed as the contract directs. Say, for example, you write an offer and it's dissed immediately by the seller -- your earnest money is returned. If the offer is accepted, you move along with the money held in trust until closing.
Less filling and tastes great for all parties involved, because everyone is getting what they want.
It's when differences arise and conflict begins to take hold that a clear understanding of the second half of the earnest money clause becomes invaluable.
To illustrate my point, let's revisit one of our area's favorite pastimes -- discord between the city of Cincinnati and the Bengals. The most recent question raised was whether it was permissible or not for marching bands to trample the hallowed ground of Paul Brown Stadium.
Pretend for a moment that the city and the Bengals are buyer and seller and that we the people, in our infinite wisdom, stay out of the fracas and allow the parties to resolve their difference to their mutual satisfaction. In a similar sense, so it is with real estate.
Resolution comes when Realtors -- whose roles can be compared to "we the people," in the sense that our obligation is to guide and not arbitrate or decide disputes -- help the buyer and seller talk among themselves and figure out how earnest money issues should be resolved. Although it's clearly stated in the purchase contract that buyer and seller "agree that the Realtors will not make a determination as to which party is entitled to the earnest money," the language is often overlooked and misunderstood.
Often buyer and seller conclude that, since the money is in the Realtor's possession, the Realtor can decide how and when it should be distributed. But, as you will see in columns to come, this isn't the case. Trust me.
STEVEN J. LOWENSTEIN, a native of Cincinnati, is a Realtor with Coletta & Associates Realtors. He's a graduate of the University of Cincinnati and holds a Master's degree from North Texas State University.
