The Importance of Earnest Money in Real Estate Transactions

Post Authored By: Christian Blume

Earnest Money can demonstrate a buyer’s intent to follow-through with a real estate contract and also entice a seller to accept an offer.  This blog article will primarily look at the Earnest Money as it applies to residential real estate transaction, and specifically in the Multi-Board Residential Real Estate Contract (“MBRE”) 7.0.  The MBRE is not the only real estate contract template that provides for earnest money.  

Do I have to deposit earnest money when buying real estate? 

No. Earnest Money is not required, like many other aspects of a real estate purchase agreement earnest money can be negotiated.  However, it is quite common, and a Seller may be reluctant to accept an offer without earnest money. 

How much should the Earnest Money amount be? 

This is something to discuss with your broker, if you are using one.  Some brokers may use 1% of the purchase price as a starting point.  However, if the listing is more competitive (multiple offers), then a broker might advise their buyer to increase the earnest money, in order to make their offer more competitive.  Like many other aspects of the agreement, the amount of earnest money can be negotiated between the parties.    

Who holds the Earnest Money?

The Earnest Money is held in trust by an Escrowee for the mutual benefit of the parties to the contract.  The Escrowee can be designated in the offer or determined during an attorney review period, it can be the Buyer’s/Seller’s Brokerage the Buyer’s/Seller’s Attorney, or any other designated party.  It is important to note that an Escrowee is responsible for complying with the terms of the earnest money disbursement, and may be held liable for improper distributions.

Can Earnest Money be increased as the purchase and sale progresses to closing?

Yes.  Some contracts may call for the deposit of initial earnest money, followed by additional earnest money to be deposited at a later date, such as after the Attorney Review and Inspection periods are completed.

Is the Buyer’s liability limited to the amount of the Earnest Money?

No.  The Earnest Money is not a default amount (or liquidated damages amount) to be paid in the event the Buyer breaches the real estate purchase agreement.  Parties can certainly limit damages to the amount of the earnest money, which is not an uncommon request in attorney modification letters.  Without any such limiting language/agreement, the Seller can seek to recover damage in excess of the Earnest Money amount, if the Buyer breaches the contract.   

What happens to the Earnest Money if the Real Estate Contract is declared null and void?

If using the MBRE 7.0 the disbursement of earnest money is generally governed by paragraph 26, which requires Earnest Money to be refunded upon the joint written direction by the Parties to the Escrowee, or upon an entry of an order by a court of competent jurisdiction.  Without consensus amongst the parties, either party may file suit seeking a court order directing the disbursement.

What can the Escrowee do if there is a dispute over the disbursement amount(s)?

If the parties cannot agree in writing as to the disbursement of earnest monies, either party can seek a court order directing disbursement.  If using the MBRE 7.0, the Escrowee may elect to give written notice as to how they intend to disburse the funds at least 14 days prior to the date of intended disbursement.  Absent an objection by either party, the Escrowee may disburse the funds as so stipulated in their written notice.   Alternatively, or in addition to the above option, the Escrowee may file lawsuit for Interpleader and deposit the earnest money with the Court, less any amount to reimburse the Escrowee for court costs and reasonable attorney’s fees.    An Escrowee that fails to properly handle/disburse the Earnest Money may be held liable.

Since Earnest Money is a common part of many residential real estate contracts, it is important for Brokers, Agents, Sellers and Buyers to understand the implications of using Earnest Money.

About the Author:

Christian Blume is a trusted legal advisor that assists businesses and individuals, to protect and pursue their interests.  My practice is focused on real estate (residential transactions and building code violations) and business law. 

Prior to establishing my private practice, I worked as an Assistant Corporation Counsel for the City of Chicago Department of Law.  I represented the City of Chicago and was responsible for numerous cases, focused on the prosecution of municipal code violations.     

I graduated cum laude from The John Marshall Law School and served as Managing Editor of The John Marshall Law Review.  I am a graduate of the United States Air Force Academy, where I majored in Economics.  Prior to law school I was a small business owner and operator.  As a small business owner, I came to appreciate the many legal struggles and issues start-ups and small businesses face. 

I live in the Lincoln Square community with my wife, and two-small children, and enjoy travel, yoga, reading and spending time with my family. 

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