The Changes in Earnest Money Deposits

July 22, 2010

In the revised California of Realtors Purchase Agreement and Escrow Instructions form, the handling of a buyer's earnest money deposit has changed. There are several options, but the newest one permits the Buyer to make an "initial deposit" directly to the escrow holder within 3 days of acceptance. Formerly, the initial deposit (earnest money) was given to the agent writing the offer at the time the offer was written. The contract stated that the check would be held uncashed until acceptance and then deposited in either the broker's trust account or into escrow.

This change eliminates the need of a prospective buyer to write a check that will need to be returned if the offer to purchase is unsuccessful.

At one time agents believed that the earnest money was an indication of how serious a buyer was and that you needed it as "consideration" in order for the purchase contract to be valid. Not the case as the promise to purchase under specified terms was "consideration".

With current purchase agreements specifying that the buyer has a 17 day (or how ever long the buyer and seller negotiate) to inspect and investigate and obtain financing before the deposit would be vulnerable to loss from buyer to seller, the initial deposit carries less influence on the solidity of the agreement. Until contingencies are removed in writing, the initial deposit is not at risk and if buyer cancels during the investigation period, the deposit must be returned to eh buyer.

We are fortunate to have our purchase agreements spell out so many of these somewhat misunderstood terms and conditions. C.A.R. makes constant attempts to simplify the wording so that all parties can be clear about their agreements.