I have probably written over 200 real estate contracts. I have had 35-40 offers accepted, and entered the due diligence phase on those. I have closed on the purchase of 25 properties now. There is one item that has been a hassle for me on 3 different occasions. Getting my earnest money back.
First, in case you are not aware, let me explain some important elements to understand about escrow. Usually, the seller gets to decide who will hold the earnest money in escrow. This never concerns me because the fiduciary duties of the escrow agent are clear. They must remain impartial and only do as instructed by both parties. The reason this is key, is that if the sale does not go through for any reason, the escrow agent will not release the money to one party without the other party’s permission. If there is a dispute, it is not for the escrow agent to preside over the dispute. In some states, the escrow is held by attorneys, in others, like Nevada, it is held by a Title Company.
So on 3 different occasions as a buyer, I have had a seller try to ‘strong arm’ me into giving them some of my earnest money when I did not buy. As near as I can figure, they determined that it would cost me a certain amount of legal fees to prove that I had done no harm, and not been in breach of the contract. So, if I just give them an amount of money less than that, I come out ahead.
I read somewhere recently that the United States has 20% of the worlds population, and 80% of the worlds civil lawsuits. This is a large part of the reason why. People want money that they are not entitled to. And so contracts get longer, and longer, and longer.
The first time this happened, was over a pretty small amount of earnest money ($2,500) and the seller eventually gave in and signed the agreement. I believe their realtor may have convinced them to.
The second time, the earnest money was $10,000 and the purchase was in another state (Tennessee) and we eventually decided to give them $2,000 – not because we were wrong, but because it was going to cost us at least that much to fight them. I call that extortion. You call it what you want. It happens often in our legal system. Someone files a lawsuit that has no real basis, and the defendant pays them some amount of money without admitting guilt – because it’s cheaper. The media will always paint this settlement as an admission of guilt. It’s just sad.
I’m currently involved in another scenario, where after I cancelled the contract, the seller said to me, “You have cost us time on the market. How much of the $6,000 earnest money are you willing to give us?” The answer was “none”. Again, we were within our rights to cancel, but they want to strong arm us. Now we are getting a lawyer. At some point, even though it costs more, you fight them, on principal. The bummer is, that we could technically spend more than $6,000 to get our money back if this goes to trial, but we don’t want them to have any of it, because it is just wrong.
So what can be done about this? My Real Estate contracts are about to get longer. When I am the buyer, the first thing I will do is insist that during the due diligence phase, the escrow release has to be single signature – MINE. This means that if I cancel the contract for any reason during that time period, I get my earnest money back; no questions asked.
After the due diligence phase is over, if there is a dispute, the contract will require binding arbitration. That way if they try to strong arm me, I have a less expensive option in front of me. Then I will stipulate that the prevailing party shall be reimbursed for costs and fees associated with attempting to resolve the dispute.
A friend of mine who is a business consultant says that he is amazed that this is not part of every real estate contract already. In all of the ones I have seen, I don’t even recall seeing it. Maybe it has been in plenty of them, but not in those 3.