In any contract, money paid to confirm the contract is recognized as earnest money. We know that a contract has three elements: Offer; Acceptance; and Consideration.
The Consideration given by the Seller is the agreement to remove the property from the market while the parties work out the terms of the contract. The Consideration given by the Buyer is Earnest Money. It is what binds the contract between the parties. It is the risk the Buyer is willing to take for the Seller to take the property off of the market for four to six weeks.
As a buyer’s attorney, real estate lawyers are tasked with carefully monitoring contingency deadlines so this earnest money isn’t lost.
At Minchella & Associates, we work closely with clients to understand all the factors involved in a sale. We have a double docketing system to make sure we do not miss contingency dates, either responding timely or asking for extensions.
A Lesson in Mortgage Extensions
A prime example of a situation where earnest money is at stake is when mortgage loans are not “clear to close” by the time the mortgage contingency expires..
Minchella & Associates has been in a similar situation, where a client had $15,000 at stake as earnest money in a contract to buy a multi-family investment property. We diligently requested all seven extensions needed to keep the deal together. We got on the phone with opposing counsel to explain the issues and our frustration to assure him that it was not my client who was failing to cooperate but that he had chosen a lender who was incredibly difficult to deal with. The lender would ask for one underwriting condition to be met at a time, never just providing us with all of the conditions so that we could assure compliance. Things dragged on until it started to affect our sellers’ purchase. There was a point at which the Seller demanded that the earnest money go “hard” if they were to grant another extension. It was incredibly frustrating for my client but certainly a fair request from the Seller.
Ultimately, the deal closed and the earnest money was applied to the purchase price, so our client did not lose the money he had risked for the purchase.
Having the Right Lawyer is Essential
As a mortgage broker working with a buyer or seller, having the right real estate law firm involved is critical. To that end, we work with buyers and sellers and have witnessed the disaster of a negligent legal team first-hand.
In one case, a client with two contracts on her condo was dealing with a buyer struggling to obtain a mortgage loan. In the end, the loan was unobtainable, and the buyer requested contract termination to retain her earnest money investment of $10,000. Unfortunately, the buyer’s lawyer never requested a mortgage contingency extension. This left the contract in default.
We settled with the other firm, so each client (buyer and seller) kept $5,000 of the earnest money. This shows the importance of an experienced legal team. If the opposing firm had applied for the mortgage extension, their client could have retrieved the entire $10,000.
The second contract default occurred the day before closing. By that time, all contingencies had expired. That default was also negotiated so that each side wound up with half of the earnest money.
Meeting Deadlines Head On
Whichever real estate law firm you and your clients choose to work with, it’s crucial to ensure they remain on top of deadlines.
Keeping relevant dates at the forefront of negotiations and contracts ensures that earnest money is kept whole until the contract is complete.
It’s also worth noting that the seller’s council has leverage with earnest money when a contract isn’t going as planned. Buyers who pull back, leaving sellers in a lurch, must meet extension and termination deadlines, or they can lose money to the seller.
There’s always a chance clients want to go to court over the money, but this is rarely in the best interest of either party. A good lawyer will tell you it’s not worth a client’s time or cost, as the red tape on these cases leaves them in litigation for years and can keep the property from going back on the market and getting sold. For both sides, paying attention to deadlines and contract terms is critical
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella has represented thousands of home sellers, buyers, landlords, and commercial and investment property owners. For more information, schedule a consultation today.