(This is an updated post from one originally published in January 2019.)
Residential real estate comes with stress and anxiety, generally caused by the challenges of finding a home and then meeting contractual requirements.
One condition of a home purchase is for buyers to deliver earnest money by a certain date – or risk having the deal fall apart.
Timing is everything, especially in a competitive housing market when decisions and actions must be taken within an agreed – often tight – timeframe. In the case of the initial deposit, sellers who have agreed to accept an offer are expecting the buyer, as the contract from the Northwest MLS states, “deliver the earnest money by the delivery date” listed on the first page.
Most real estate sales on the west side of the Mississippi River are handled by escrow companies. (Lawyers tend to take on this responsibility in other parts of the country.) Escrow is an impartial, third-party agency that accepts residential purchase-and-sale documents and funds to complete the transaction. The escrow agent, also known as closing agent, is required to follow mutually accepted instructions from all parties – including the delivery of the earnest money to the escrow offices.
Seattle/King County buyers typically make an earnest money deposit of 1%-3% of the purchase price. There is no minimum amount required but a three-digit deposit would send the wrong message to sellers. In fact, some people make a bigger impression with a seller by including a significantly higher deposit.
The question comes down to how much earnest money buyers are comfortable putting down on the property. For example, if a buyer has $100,000 in available funds for the purchase of a $500,000 home, he/she may want to put $30,000, or 6% of the purchase price, toward the earnest money deposit. Now that’s being earnest! (For buyers, about 3% of the purchase price goes toward closing costs.)
A good broker with negotiating skills will use his/her insights to advise buyers on earnest money as well as share estimated closing costs in advance of closing. The real estate professional will also instruct buyers on how to deliver the deposit. The onus is generally on the buyer to make that happen, but real estate brokers will assist wherever possible.
Delivery of earnest money is typically 2-5 business days after mutual acceptance. If the contract does not specify a period, the default is two business days. For example, if an offer is accepted on either a Saturday or Sunday, the earnest money deposit is due by end of business on Tuesday (two business days after mutual acceptance). Failing to meet this deadline is an opportunity for the seller to terminate the agreement.
Since the pandemic, the practice of delivering funds to escrow has changed. The process has shifted to a mostly electronic, hands-free delivery of the money. Paper checks – payable to the escrow company, not the seller or real estate firm – are less common but still accepted.
Dropping a check in a mailbox – addressed to the escrow company – is not good enough to satisfy the earnest money delivery. (Have you mailed a letter or card lately?!) Until 2021, buyers were permitted to mail the deposit and escrow would count the postmark on the envelope as the day in which to count back the number of days from mutual acceptance. No longer.
Personal checks delivered to escrow can be held for a week or more – at least one agency holds them for as long as nine days – until they clear, potentially risking termination of the transaction. Escrow will typically call “delivery” of funds after a receipt is issued to a buyer, satisfying the terms of the contract. It’s important, though, to be sure that “delivery” is clearly defined and understood by all parties in the transaction.
In addition, escrow companies typically do not accept personal checks that fail to include the name and/or matching home address of the buyer. Preprinted checks are essentially required when using a personal check.
A cashier’s check from a bank is acceptable but at least one local financial institution no longer provides that service. Escrow usually holds these checks for up to one business day before accepting the funds.
Banks will wire funds, both for earnest money and the down payment, before the settlement date. If buyers have funds wired, the transfer must be completed by the due date – not in process – and escrow companies tend to accept the funds immediately.
Escrow companies will not accept cash, foreign monies or crypto-currency and many do not take automated clearing house (ACH) funds or money orders. Some escrow companies do not accept so-called official checks (as opposed to cashier’s checks). Buyers should specifically ask for a cashier’s check (or wired funds) when working with a bank.
The pandemic also prompted escrow companies to unveil their own proprietary money-transfer app or partnered with a company to help address security, speed and other concerns. The apps include two-factor authentication. Using names such as ZOCCAM, Earnnest, CWSecure and startSAFE, the apps are generally a fast and safe way to get funds to escrow but they, too, can have drawbacks.
Some apps simply require buyers to take a picture of the check to confirm payment but then escrow may hold the funds for several days. Delivery of the photographed check via the app is not necessarily “timely;” one local escrow company holds app-delivered checks for seven days.
The escrow agent – or buyer broker, if the funds were handed to him/her – will provide proof of the good-faith deposit in the form of a receipt and photocopy the check. The deposit is ordinarily put towards the purchase price and closing costs.
Best practice – to efficiently deliver funds – is for buyers to take this responsibility on their shoulders and work with escrow to complete the transfer in a timely manner and leave out “the middleman” when possible.
State law says no more than 5% of the property’s purchase price – not a maximum dollar amount – can be treated as damages for a seller in a dispute. Any earnest money above 5% of the accepted price must be returned to the buyer. In the above example, where 6% of the $500,000 purchase price is used as earnest money, the buyer is confident in knowing at least 1% would be returned.
Amid the ultra-competitive housing environment of recent years, some buyers are offering a non-refundable fee to sellers. The fee is used as part of the offer and would be applied to the closing costs, but sellers receive the separated funds immediately after clearing the mandated escrow holding period. Buyers sometime mistakenly send these non-refundable fees to escrow unaware the funds will be held for the above-stated clearing periods. These types of deposits should be in the form of a cashier’s check or wire transfer to avoid unpleasant delays with the intended use of those fees.
One final word of warning: Wire fraud is a big issue in our lives, including real estate transactions. Always follow the guidance of your real estate agent, financial institution and, most importantly, your escrow company representative. Escrow agents will provide wire and other fund-transfer instructions through either in-person guidance or via the company’s secure website communications hub. Be very wary of instructions delivered via email, text or phone call.