LEGAL TALK by Phyllis Oeser



The Earnest Money Contract

Now what kind of money is that? “Earnest Money"? I don't know the history of the term “Earnest Money.” What it implies is if someone is truly interested in purchasing a property they will be willing to place a certain sum of money to show their earnest intent. The Texas Real Estate Commission (TREC) form is officially titled “One to Four Family Residential Contract (Resale)" and is used when selling a previously owned residence. However, it is much better known by its nickname, the Earnest Money Contract.

In our previous articles we discussed what to do prior to posting your “For Sale” sign. Once there is a buyer interested, the next step is to have a written earnest money contract drawn up either by your realtor or your attorney.

There are other TREC forms for selling vacant land, business properties and other types of properties. The Earnest Money Contract is so important and it contains so many details there is not sufficient space within this article to discuss the importance of each and every one. Although many real estate transactions have many things in common, each contract and transaction is different because the facts, property and people are different.

Think of the Earnest Money Contract as being the road map of the transaction for all parties. If negotiated completely and drafted properly it should address most issues that arise. Therefore, all negotiations between the parties should be finished prior to its completion.

First the Earnest Money Contract will list the names and addresses of the buyers and sellers, and a description of the property, the sales price and the amount of earnest money the buyer will put in escrow. Many people think this is all that is necessary, and although the foregoing is required there are many other important details to address.

The earnest money is usually held by an impartial third party known as the escrow agent, and which is most often a title company. The earnest money contract provides the title company the necessary instructions as to how to close this particular real estate transaction, such as who is going to pay what closing cost, the date the transaction must be completed and many other details. It is also a road map for buyer and seller, stating when the seller must vacant the property, when the buyer can move into the property, what items will be left or removed from the property and many, many other details.

It will also state whether the purchaser is utilizing third party financing (usually from a bank or mortgage company), and the details (such as the amount, interest rate and length of years) for the financing. Usually the contract is made contingent upon the purchaser being able to secure financing. Therefore if you are the purchaser and you are unable to qualify for a loan, you usually can terminate the contract and your earnest money will be returned to you. If the seller is owner financing the property, the details regarding the owner financing will be stated within the contract.

This contract will state who pays for the title insurance, a new survey (if required) and it will also address insurance issues. Deadlines for the parties and the title company to take certain actions will be listed in the Earnest Money Contract It also states whether the property is subject to homeowner association fees, what tax districts apply, whether lead based paint is present, the condition of the property and the extent to whether the seller will pay for any repairs. It sets out deadlines for the research of the title and for inspections of the property. The Earnest Money Contract will also address brokers' fees and environmental matters.

There is a paragraph titled Special Provisions, with an open space that allows the realtor or attorney to include their own language to address anything that the contract does not address. For example, this space is often used to state whether any appliances will be removed or not, or some other detail specific to this particular transaction.

Another important feature of the Earnest Money Contract is to state the rights of each party if the other defaults. It also addresses whether the parties will be required to attend a mediation to try to resolve their differences. There is language regarding the proration of the real property taxes.

I cannot stress enough to you the importance of having a well drafted Earnest Money Contract. With the TREC form much of the language is in place; however the proper boxes must be checked and all decisions should be given the proper discussion and consideration. The discussion and negotiation between the parties is what causes issues specific to this transaction to surface. Therefore, if all of the parties will take sufficient time to fully discuss and negotiate all issues and expectations, half the work will be completed and they can look forward to a smooth real estate transaction.

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