One of life’s most exciting events is, without a doubt, buying a home. For many people, their hopes for the future are closely intertwined with finding the perfect place to live, but for first-time home buyers, the purchase process can be riddled with challenges. Even after obeying Missouri’s strict laws for negotiations, inspections, and deposits, unexpected complications can still derail the purchase.
When you’re buying a new home, one phrase you will hear a lot is “earnest money deposit.” An earnest money deposit is the first financial step you take in your home-buying journey. It provides reassurance to sellers while helping potential buyers get their feet firmly under the table.
Working with an experienced Missouri real estate lawyer who is familiar with the rules and regulations of the Missouri housing market can provide some sense of reassurance. Having an attorney you can rely on is usually enough to resolve any potential disputes. In fact, dependable legal counsel is often the difference between a failed deal and a successful home purchase.
What Is Earnest Money?
Where real estate transactions are concerned, earnest money refers to the deposit a buyer makes to the seller to show good faith when entering into a real estate contract. Simply put, it is how the buyer demonstrates their intention to purchase a property. The amount required varies between 2% and 10% of the purchase price, and must be rendered within two working days of contract acceptance.
The Importance of Earnest Money in Real Estate
In home buying transactions, earnest money serves multiple purposes, including:
- Initiating the transaction: An earnest money deposit denotes the start of the legally or financially binding process of purchasing a property.
- Securing the offer: Earnest money serves as a deposit that shows the seller you are committed to the purchase and temporarily secures the property on your behalf.
- Compensating the seller in case of withdrawal: Should the buyer choose to renege on the deal without a valid, contract-based reason, the seller is usually entitled to keep the earnest money as compensation for the time their property was not available to other potential buyers. In most cases, earnest money reverts to the buyer if the seller decides to back out of the deal, so it’s important to understand the consequences and requirements outlined in the contract.
How Is Earnest Money Handled?
Once the parties agree to the sale, the earnest money is held in a third-party escrow account, such as one managed by a title company, a legal firm, or a real estate brokerage, until closing. The earnest money is then applied to closing costs or the down payment.
What Are the Benefits of Earnest Money?
An earnest money deposit can help secure a buyer’s position in a competitive housing market by demonstrating to the seller that they are serious and plan to follow through with the purchase. Contrariwise, it offers sellers extra security by ensuring they are fairly compensated should the buyer back out of the purchase for reasons not addressed in the contract.
Potential Risks of Earnest Money Deposits
While there will always be risks for those buying and selling real estate, earnest money helps facilitate a safer transaction. Common risks include:
- Sellers: Since sellers entering into a real estate contract are required to take the property off the market for inspections and appraisal, they run the risk of the buyer ultimately backing out of the deal. An earnest money deposit is designed to mitigate this risk.
- Buyers: The main risk for buyers is the forfeiture of their earnest money if they choose to back out of the purchase for a reason not stipulated in the contract. To protect themselves, buyers need to understand the contingencies stated in the contract that let them reclaim their deposit.
Protecting Both Parties’ Interests
There are steps that buyers and sellers can take to safeguard their interests in transactions involving earnest money. They include:
- Legal guidance: Consult with a trusted Missouri real estate attorney to ensure you understand the state laws and contract terms governing your deposit.
- Timely actions: Both the buyer and the seller must abide by the timelines set forth in the contract pertaining to appraisals, inspections, and securing financing to avoid preventable disputes.
- Clear contingencies: Be sure that the contract clearly summarizes the conditions under which the buyer can reclaim the earnest money deposit, such as financing issues, insufficient appraisals, or failed inspections.
Handling Earnest Money Conflicts
Conflicts over earnest money deposits often arise when transactions fall through. Best practices for settling these types of conflicts include arbitration and mediation, as stipulated in your contract, or, if necessary, seeking experienced legal counsel from a Missouri real estate lawyer. Open, clear communication and a willingness to negotiate are usually effective at resolving disputes without going to court.
Talk to a Missouri Real Estate Attorney Today
By offering assurance and security to both buyers and sellers, earnest money deposits play an important role in real estate transactions. Always review the contract before committing to anything, seek professional legal advice if you have any questions, and support open lines of communication throughout the transaction to ensure an efficient and successful sale.
Real estate transactions in Missouri demand strict attention to disclosure requirements, state-specific deadlines, and coordination with multiple parties. From the two-day deadline for the earnest money deposit to the optional attorney review window, the success of your Missouri real estate transaction depends heavily on thorough documentation and exact timing.
To schedule a legal consultation with one of our knowledgeable Missouri real estate lawyers, call Wegmann Law Firm at (636) 797-2665 or fill out our online contact form.
