Photo (cc) by Images_of_Money
Here’s a recent email I got from a reader…
First of all, I am a huge fan! I have just won a settlement and want to buy a home straight out! I have found the PERFECT one, but in order to put in my bid the agent told me I had to give her a check for $1,000. But what I found odd was the check wouldn’t be cashed until the seller agreed to my offer and then the money went into escrow. I don’t have $1,000 off hand, but I don’t want to lose this house either! The settlement money is about a month away from my hands! Can you help me with this? Is what they want legal? I have poor credit and live off of disability, so buying straight out is my best option! Please help me before I lose this place!!
Here’s your answer, Candy!
What the agent is suggesting is called earnest money, and it’s quite common. The purpose of earnest money is simply to make sure you’re a serious buyer.
As a seller, before I stop talking to other potential buyers, I want to make sure you’re going to follow through with your offer. One way I can do that is to ask you to put some earnest money where your mouth is. In this case, you give me $1,000, it’s held in escrow until the deal closes, then it’s applied to your purchase price.
If you decide to walk away from the deal, however, I get to keep the earnest money for the trouble you put me through.
That being said, there are common situations where you’ll get your earnest money back. For example, you should never buy a house without a thorough professional inspection. Your contract to purchase the house should stipulate that based on the results of that inspection, you can walk away and keep your earnest money. There are other provisions you might include in a purchase contract – they’re called contingencies, because your purchase is contingent upon them.
In short, what they’re asking is both common and legal.
Now let’s move on to something you didn’t ask, but I’m going to tell you anyway. Candy, you need to take a breath.
The fact that you’re not familiar with earnest money is a clue that you need to do a little more reading and a little less shopping. And the perfect time for knowledge-gathering is now, while you’re waiting for your settlement.
Buying a house isn’t rocket science, but there are still things you need to know. After all, this is a big purchase, probably the biggest of your life. So please – I’m begging here – take a little time, read some articles (we’ve got plenty right here in our real estate section, and there’s lots more around the Web), and start getting the lay of the land.
I think your timing is right. We said back in April, Housing Has Bottomed – It’s Time to Buy. But that doesn’t mean you have to be in a big rush. While I think the bottom of real estate prices has been reached in most parts of the country, the train hasn’t left the station. The recovery is going to be slow and gradual. Prices will still be good in a few months, and if you miss this perfect home, you can bet there’s another one around the corner.