How Many Earnest Money Deposits Did The Seller Collect?
A Student called me and said that he had advertised a property for sale that he just got under contract the previous day. I had worked with him for a while to get the seller to agree to a longer inspection period and a smaller deposit. The seller finally relented. This seller had purchased the mortgage on the property at a hugely discounted price and then foreclosed to get title.
The Student said he started getting calls on the property immediately after putting it out to his email list. The problem was that four other investors called to ask why he was “stealing their deal.” It seemed each of them had a signed contract from the same seller for the same property! There seemed to be no mistake, the seller had signed four other contracts or possibly even more and had collected a deposit from each buyer. One other contract might be explainable, but four that we knew of, is way too many.
I remember a property I went to see where the homeowner made an appointment with me for a specific time. When we arrived we saw three other investors that we knew who were parked out front of the property. The homeowner and her “husband”, who turned out to be her boyfriend, were inside taking deposits from anyone that would give them a contract and a cash deposit at the time.
The “deal” they were offering was so tempting that at least four investors each gave the seller a $2,500 cash Earnest Money Deposit (EMD). In the end, the sellers skipped town with the cash. No one bought the house because the seller was not the wife of the owner on title and her boyfriend was not the husband as he has signed on the contract.
The lesson here is to allow an independent third party to hold your deposit and put the clause in your contract that you will get back your deposit automatically if the seller can’t close timely. This clause can’t be your typical, “If the Seller is unable to close the Buyer gets his EMD back”; no, it has to be definitive that “the Seller hereby authorizes the closing agent to release the EMD if the Seller can’t close timely.” We also use a similar clause all the time as sellers so we can get the buyer’s EMD if he doesn’t close timely. If you haven’t used one previously, ask your closing agent what specific language he would want and use it while he holds your EMD.
In summary, with Earnest Money Deposits, you should never give money to a seller under any circumstances. The greed factor that makes these scams work is “The deal is too good to be true!” The harder and faster a seller pushes you to close, beware! Time is your friend, not your enemy.
Licensed real estate agents and brokers have very limited liability in these cases because of disclaimer clauses in their State Realtors® Association Standard contracts. These clauses essentially indemnify the agent from the deal going bad and any liability on their part. However, they are almost always required by their brokers to carry an Errors and Omissions (E & O) Insurance Policy just in case.
As I always say, “A little kiss of common sense may keep you from ultimately kissing your money goodbye!”
To your limitless success,