To say that purchasing a home is a big investment is a bit of an understatement. Unfortunately, too many purchasers take the offer process too lightly and don’t understand all of the provisions in the purchase agreement. A good buyer’s realtor is the key to protecting you from making major mistakes.
This problem recently came to light in a deal for an offer to purchase a condo. The condo was listed by the listing agent as available for sale via FHA and VA financing. However, condo associations are required to be pre-approved for FHA financing, and this particular association was not pre-approved. The buyer’s lender discovered this fact just before closing and would not approve the FHA loan. Since the buyer’s could not obtain FHA financing they terminated the agreement within the terms of the purchase agreement. The problem is that the buyers put down a $10,000.00 earnest money deposit. Even though the property was misrepresented in the listing agreement, the sellers argued that my clients breached the agreement and that they are entitled to the earnest money.
The first question the buyers asked when they retained me was how they could have prevented this problem. While nothing may have prevented this issue in its entirety, they could have mitigated their losses by only putting forth a $500.00 earnest money deposit. An earnest money deposit is a show of good faith that the purchaser is serious about his/her intent to purchase the property. A typical earnest money deposit in our market is $500 – $1,000, no more is necessary. A larger earnest money deposit does not show any more good faith. In fact, the more earnest money on the table, the greater the chance that if the buyer rescinds the offer, the seller will argue that the buyer is in default, and therefore that the earnest money deposit should be given to them.
In September 2010 the Toledo Bar Association and the Toledo Board of Realtors approved updated versions of the real estate purchase agreements. The new Financing Contingency reads as follows:
FINANCING. This Agreement ____ is not ____ is conditioned upon Purchaser securing a Conventional ___ FHA ___ VA ___ Other (if Other is selected, write in type of loan) loan commitment within _____ days (this provision is not applicable if the number of days is left blank) after Acceptance (the “Financing Contingency Period”). Purchaser shall pursue such loan in good faith and with reasonable diligence. If a loan commitment specific to the Property cannot be obtained by Purchaser, either party may terminate this Agreement by delivering written notice of termination to the other within three (3) days from the expiration of the Financing Contingency Period and the termination procedures of Paragraph 21 shall apply. If this Agreement is not terminated as provided in this Paragraph 5, Purchaser shall be deemed to have the ability to obtain the loan, this Agreement shall no longer be subject to this financing contingency, and the method of payment shall be deemed to be “all cash”.
I recommend that when submitting an offer that is contingent on financing, make the contingency for the same time period that the purchase is required to be completed (i.e. the closing date). Further, cross out the last sentence in the above contingency paragraph converting the deal to a cash basis. Therefore, if any last minute changes in financing arise, or your lender deems you are not eligible for a certain type of loan despite an earlier commitment, (i.e. because the property is not FHA approved) you as the buyer are not required to complete a sale on terms that are not in your best interest, or on a cash basis as stated in the agreement.
So the answer is NO, more earnest money does not mean more good faith. Don’t have your deposit tied-up arguing over who breached the agreement, have your agreement reviewed by an attorney. Both parties to a real estate purchase agreement have a 3 day right of rescission after acceptance of the offer; take this opportunity to make sure that the contract best protects your investment!