Definition: When making an offer to purchase real estate, the buyer normally includes a deposit cheque with the offer. This is sometimes called ‘earnest money’ and helps to lock the buyer into the deal.
At certain points in the transaction, (once all conditions have been satisfied or removed) the ‘earnest money’ becomes non-refundable. IE: if the buyer attempts to back out of the deal at that point, he/she will forfeit the deposit payment to the home seller.
As the real estate industry explains it
What is earnest money? Depositing earnest money is an important part of the home-buying process. It tells the real estate seller you’re in earnest as a buyer, and it helps fund your down payment. The earnest money check is typically cashed and held in a title company trust account, or in the broker’s escrow account. You get a receipt from your brokerage when you hand in the earnest money.
Without the requirement of earnest money, a real estate buyer could make offers on many homes, essentially taking them off the market until they decided which one they liked best. Sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.
Assuming that all goes well and the buyer’s good-faith offer is accepted by the seller, the earnest money funds go toward the down payment and closing costs. In effect, earnest money is just paying more of the down payment and closing costs upfront. In many circumstances, buyers can get most of the earnest money back if they discover something they don’t like about the home.
Path of the Deposit Money
Just a quick primer on the path of monies on deposit for a purchase. Deposit monies are essentially trust monies and trust monies, in our society, are serious business. You have been trained on this, as have lawyers, and it is easy to make a mistake.
Deposit monies can be held in trust by a lawyer, if they are not paid to the vendor, (but paying to the vendor is risky and generally a bad idea). Most often though, it will be held by your broker pursuant to the Real Estate Brokers act.
If you are active on the transaction as agent or a party, it makes infinite sense to distance yourself from trust transactions and have someone else not directly involved make every trust money decision by the book. Cheques can be written on this account of course, and this money, although in the account of the Real Estate company, is still technically the property of the vendor and purchaser, until it is paid out on a final deal.
The monies are held and applied against the agent’s commission (usually) in a completed deal and obviously the purchaser receives a credit against the purchase price. If you have ever seen a lawyers file, the calculations/adjustments that the client will see, takes the deposit out of the closing transaction calculation.
This can be confusing to clients because it is not part of the money we handle, so if it seems to them that the deposit money has not been taken into account, it has, just not through our offices. (By Real Estate Lawyer, Gord Steeves in Winnipeg)Never miss an episode of our real estate podcast. Install our FREE Podcast App available on iOS and Android. For your Apple Devices, click here to install our iOS App. For your Android Devices, click here to install our Android App. Check my videos on Youtube