Dear Monty: We want to make an offer on a home in Wisconsin. Our real estate agent wants us to put $10,000 down as earnest money. She said it would show the sellers how much we like the house and may be an influence if there is another buyer. While the advice could be accurate, we are still determining if the sellers will accept our offer or other potential events that may develop. We would appreciate your thoughts.
Monty’s Answer: The history of earnest money deposits goes back a long way. Wikipedia states: “In the Middle Ages, the earnest payment was called an earnest penny, Arles penny, or God’s silver (in Latin: Argentum Dei). It was either money or a valuable coin or token given to bind a bargain, notably for the purchase or hiring of a servant.” In today’s world, there is no requirement for earnest money to bind a bargain in any state. Earnest money is seen as a gesture of good faith. Still, it is often assumed to be an integral component of an offer.
Earnest Money Is Not Well Understood
As a whole, homebuyers, home sellers and real estate agents know the basics but not the details. How many of you reading this now know earnest money isn’t necessary? Obliquely, buyers make deposits because there is a line in the offer to purchase calling for it. Home sellers know about it because the listing agreement mentions it. Real estate agents see the words every time they complete an offer. If after fulfilling the contingencies a default occurs, the disbursement of earnest money is a mystery.In Wisconsin, this is what happens to the earnest money if there is a buyer default and the seller requests and receives the earnest money as the total liquidated damages:
No. 1: First, the real estate company is paid for cash advances made by them on behalf of the seller.
No. 2: One-half of the balance, but not above the agreed commission, shall be paid to the real estate company as full commission in connection with the transaction.
No. 3: The balance belongs to the seller.
No. 4: The payment to the real estate company shall not terminate the listing.
Does an agent in Wisconsin have a potential conflict of interest by suggesting the deposit amount?
So, What Should You Do?
Every buyer, seller and agent have different circumstances, and every state has different ways of handling earnest money. So, your concern is valid. Consider having an attorney hear your concern about the deposit size and review the offer before you agree to the $10,000 deposit.Not every state has this default language in the listing contract. But a homebuyer should consider learning how the distribution of a forfeited deposit works in their state before taking an agent’s recommendation.
Summary
The buyer can avoid losing earnest money by not making a deposit. The seller may refuse a no-deposit offer and lose trust in the buyer’s motives.Conversely, the buyer increases their risk by making a deposit but gains no seller favor because the seller assumes a deposit was necessary. My experience was that disputes over earnest money were not frequent, but not exactly rare. Still, when disputes happened, it was costly for both parties.
Anecdotally, earnest money is not a consideration in most negotiations.
