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SOME TIPS ON EARNEST MONEY - The Washington Post

Please update your browser permissions to allow them. Q Does District law require that "earnest money" provided as a deposit on a house or apartment purchase be put into an interest-bearing escrow account? If so, who is entitled to the interest? A I'm going to expand your question to include Maryland and Virginia.

When buying a house, a condominium or cooperative apartment, the buyer generally is asked to put down some money that represents a "good-faith, earnest money deposit.

This money is referred to as a "good-faith, earnest money deposit.

There are no legal requirements or restrictions dealing with the subject of these deposits. As this column has suggested on many occasions, everything is negotiable.

If I am representing a seller, I want the earnest money deposit to be high. If I am representing the purchaser, I want the earnest money to be low, and indeed even a promissory note and a handshake would suffice. Generally, there is a compromise reached between buyer and seller on the amount of the deposit. If there are real estate agents involved, they often will hold a deposit, and they usually suggest that the good-faith deposit be in the amount of about 10 percent of the purchase price.

In most real estate contracts, in the event of a default, the real estate brokerage firm splits the deposit with the seller this explains why the broker wants the deposit as high as 10 percent. But there is no legal requirement for this amount. You do, however, want to persuade the seller that you are serious in your desire to purchase the house, and clearly the more you put down, the more serious you appear.

I have often recommended that a good compromise is 5 percent.

However, there are circumstances when the purchaser either does not have the money immediately or does not want to tap into a certificate of deposit -- and thereby lose interest and perhaps be penalized -- and, as a result, a promissory note often is entered into. The buyer and the seller must be happy with the arrangement, since it becomes part of the sales contract.

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With respect to the interest that these funds earn, again there are no legal requirements. The buyer should require that the funds be held in an interest-bearing account. The buyer also should request that the interest accrue in favor of the buyer, in the event that settlement takes place.

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This is a very common practice, and the buyer should include the following language in the purchase contract: If the broker is reluctant or unwilling to place the deposit in an interest-bearing account, have your attorney hold the deposit in such an account. You have indicated that you are buying the property directly from the seller, and there is no agent involved in the transaction.

It is strongly recommended that you do not let the seller hold the deposit. This money should be placed in an interest-bearing account with your attorney, or with some other third party, to assure you that if you do not go to settlement for any reason other than your default, the money will be available to be returned to you.

Let us assume that you have given the seller the deposit to hold directly; you then have an inspection of the property, pursuant to the terms of your contract, and you do not like what you see. Or, for example, you make diligent application for financing, but you are turned down within the financing contingency period that is authorized in the contract.

Or there are legal impediments that restrict the seller's ability to give you clear title. Under all of these circumstances, you are not in default, but you cannot go forward with the purchase of the property. However, the seller is holding your money, and for all you know may already have spent those funds. Absent a contractual oligation, they are not required to escrow the funds, nor indeed is there any way to monitor the whereabouts of your deposit.

In most real estate contracts, if the purchaser is in default, sellers have two options. They either treat the deposit as liquidated damages, in which case a seller and the buyer are relieved from any further liability or obligations under the contract, or the seller can file suit against the buyer for actual damages.

Keep in mind that no seller wants to take a house off the market for a period of two or three months, only to find that the buyer has decided to walk away from the deal. Thus, careful negotiations on this point must be entered into before you sign the binding sales contract.

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Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite , 17th St. Readers may also send questions to him at that address. Turn on desktop notifications?

Accessibility for screenreader Home Page U. Share on Google Plus. Be the first to know about new stories from PowerPost. SOME TIPS ON EARNEST MONEY. Kass By Benny L. Kass May 23, You can leave feedback for the Post newsroom by emailing comments washpost. For more on how we manage comments and other feedback, please see our discussion and submission guidelines.

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