Checking The Pulse Of The Kansas City Real Estate Market

Let’s begin by discussing what an Earnest Deposit Money is not. When selling your home, it’s not any guarantee that a buyer won’t cancel the contract on you. If a buyer does cancel the contract, it’s no guarantee that you’ll get to keep the earnest money. You MIGHT get to keep it, but in almost all cases where a contract is canceled, I see the earnest money returned to the home buyer.

Last week I was presenting an offer to an Olathe Kansas home seller and they said they wanted to ask the buyer for a larger earnest money deposit, since they’d get to keep that money if the buyer canceled. I explained we could ask for a larger earnest money deposit, but no matter the amount, it’s no guarantee the seller would get to keep the money if the buyer cancels the contract. The Financing Addendum would allow the buyer to cancel and get their earnest money back if they can’t get the loan due to a job loss… The Contingency For Sale And Closing Addendum would allow the buyer to cancel the contract and get their earnest money back if the contract on the buyer’s current home fell through… The Inspection Period would allow the buyer to cancel the contract and get their earnest money back if the buyer’s home inspector finds  a broken door stop…

There are many reasons a buyer may cancel a contract and many of those do allow the buyer to get their earnest money deposit returned. Of course, if a buyer should breach the contract and walk away for a reason not permitted by the real estate sale contract, the home seller would likely get to keep the earnest money. Who decides whether the buyer or seller gets to keep the earnest money when a contract falls apart? Both sides do and both must agree by signing off how the earnest money gets distributed out of escrow — if either side balks, the earnest money could sit in escrow for months waiting for a decision on the matter from Judge Judy.

How much earnest money is required? There’s no set amount and a buyer can offer up any amount they feel best serves their own interests. Of course, it has to be enough the seller feels good about the situation too. In other words, it’s negotiable. In our previous seller’s market, two to five percent would usually do the trick. But, in our current buyer’s market, it’s not uncommon to see $500 to 1.5% of the purchase price get the job done. In case you’re wondering, you can offer NOTHING in the way of earnest money and a contract could still be valid. Although it’s acceptable to not put down any earnest money, I wouldn’t advise trying it.

When a deal gets canceled, getting the earnest money back could be further complicated if the seller was allowed to hold the earnest money. On resale homes, the money almost always goes into escrow — either with the listing agent’s brokerage or with a title company – and this won’t be an issue. But with new home construction, the protocol for years has been to allow the Kansas City home builder to hold the earnest money. Without doing it this way, builders would refuse to consider an offer or refuse to start construction of a home (or continue on with construction of a home that’s already started).

Non-refundable earnest money deposits being held by Kansas City home builders has long been accepted because it holds a buyers hand to the fire in helping to ensure the buyer doesn’t walk away after home construction has begun… Or imagine if a buyer has blue counter tops installed and then walks away from the deal.  Yet for all the sense this makes in many cases, there’s also risk involved for a home buyer. Just imagine what might happen if the builder went out of business after accepting your earnest money deposit but before your home is completed. This isn’t quite as concerning on completed spec homes that close quickly and on which many builders will accept refundable earnest deposits being put into an escrow account.

Posted by Jason A. Brown