patrick.net

"It is up the the person to accept or reject any such claim."

There are a few, but there are so many idiots out there! and lets face it ... the many in the RE industry are robbing the public blind.

"Mark Says:
March 23rd, 2007 at 9:30 am
General question here for a “newbie” to house-hunting–
In order to make an offer, do you have to put in a “good faith” deposit? I understand these kinds of deposits can be anywhere from 1-5K. It seems like it’d be hard to negotiate with multiple sellers if your money is tied up with 1-2 “good faith” deposits”.
Thanks for the advice! "

To be clear. You normally write a check at the time you submit the offer. That check is only then cashed an put into the escrow at the time the offer is accepted.
You write the check for a couple of reasons.
1. It shows you are serious, and keeps things moving. There is no offer accepted, now we have to shake out the deposit from the buyer. It all goes smoothly, the offer gets accepted the check is in escrow and things move from there.
2. This was alluded to in the question. Yes, the money is tied up during the negotiations after the initial offer. This is only fair since the seller is locked into the deal at that point. Unless someone is looking for multiple properties, they should not be negotiating on other properties after a deal is made.

and put into the escrow,

sorry keyboard is acting up.

We've been offering fair-market-value + a decent premium for homes we would really enjoy living in for some years for over a year now.

Very few seller agents/sellers have even responded. Only a couple times have responses been 'serious' (meaning willing to give on price, not just everything_but_price).

The problem is all the negotiation skills in the world won't help if there's no possible deal. In negotiation lingo, there is no zone-of-possible-agreement.

It's like this (RP = reserve price, your max, seller's min):

You ---- $(buyer)RP ___[No_Deal_Possible]___ $(seller)RP ---- Seller

Until the seller quits viewing their RP as the lowest they can go before having better alternatives than doing the deal, there will never be a deal. We've discussed endlessly what will make the seller drop their RP. But the main sticking point for the seller is their "mental accounting". Essentially, unless something forces the seller to refactor their mental accounting, like a looming foreclosure, a divorce, had-it-with-waiting to move into the retirement community, etc., they are very unlikely to move their RP by enough to meet your RP.

And of course many people think that us here have our RPs stuck too low. We don't believe that by and large, but in reality both parties RP will move, or there won't be a deal.

You ---- $(seller)RP __[Deal_Zone]___ $(buyer)RP ---- Seller

Randy, I believe "fair market value" is whatever price being transacted in the market. So if you are offering "fair-market-value + a decent premium", you will be offering way over asking and we will have to tickle you. :)

There is simply a disconnect of what the "fair market value" in the future will be.

Malcolm Says:

To be clear. You normally write a check at the time you submit the offer. That check is only then cashed an put into the escrow at the time the offer is accepted.

Ok, I want some first-hand input from our regulars here: is this the norm for states outside CA? I don't believe this is generally true (pre-bubble at least) for CA, though I could be wrong as I haven't been through the process yet myself.

You write the check for a couple of reasons.

2. This was alluded to in the question. Yes, the money is tied up during the negotiations after the initial offer. This is only fair since the seller is locked into the deal at that point. Unless someone is looking for multiple properties, they should not be negotiating on other properties after a deal is made.

I have a few problems with this line of reasoning:

--Why is it prefectly "fair" for the buyer to have several $grand tied up in escrow, while the seller is free to continue "entertaining" multiple offers from other prospective buyers, inciting bidding wars (real or imaginary) all they want, and then backing out for any reason?

--If s/he is so serious about accepting the offer, why isn't the SELLER expected put up a "good faith deposit" of their own? In the end, the buyer is the only one who is truly bringing any money to the table in a RE transaction and the one who is accepting the greatest risk --by far.

"There is simply a disconnect of what the “fair market value” in the future will be."

LOL! agreed! Just like Yahoo at $350/share before it nose dives to 10/share

HARM,
In Massachusetts at least, yes, a "good faith" deposit is de rigeur. The concession from the seller is that once they accept your initial offer and the money is tied up in escrow, they are not supposed to entertain other offers (ie, no open houses, showings, newspaper listings, etc.) and the local MLS is supposed to show the property as "under agreement". Their cost in this matter is having their listing pulled off the market during negotiations. Pretty fair, I'd say.

I have a few problems with this line of reasoning:

"–Why is it prefectly “fair” for the buyer to have several $grand tied up in escrow, while the seller is free to continue “entertaining” multiple offers from other prospective buyers, inciting bidding wars (real or imaginary) all they want, and then backing out for any reason?"

They can't. It is very easy for a buyer to back out, but a seller is more likely to end up in court. They can't field other offers except as a backup. Pretty much as a seller when you say accepted you are locked in.

"–If s/he is so serious about accepting the offer, why isn’t the SELLER expected put up a “good faith deposit” of their own? In the end, the buyer is the only one who is truly bringing any money to the table in a RE transaction and the one who is accepting the greatest risk –by far. "

Normally the buyer is the person paying for something. This is just nonsense, but even so the seller has many costs they have to pay for so they are putting their money up. Sell a house, and you will know first hand. They have to often come out of pocket to make the negotiated repairs, as well as termite clearance. Sometimes these can be paid from the proceeds, but the point barely merits a response.

I would show them my wallet or checkbook in my hand and
say do you want to talk or watch me leave.

(1) Your allowing the other party to take the lead in negotiation.
(2) You may need that cash for real deposit on a better deal.
(3) No such thing as up front cash from what your saying.
#uck'em... only crooks do that.
(4) no contractual obligation on your part to give any money no services have been preformed. ..

Are you blind man?

#2 is why I would let you leave.

#1 the buyer leads the negotiation the whole way. They normally have 14 - 21 days to come up with additional demands, and the deal can only get better for them.

#4 Yes there is, that becomes part of the contract. One way to end the contract early and dump a flaky buyer is when their good faith check bounces. Then you know to walk away.

"“–If s/he is so serious about accepting the offer, why isn’t the SELLER expected put up a “good faith deposit” of their own? In the end, the buyer is the only one who is truly bringing any money to the table in a RE transaction and the one who is accepting the greatest risk –by far. ”

Folks you need to know money as deposit is only valid when contract is signed. Just like your rental deal..... The day you hand over that deposit is the day you sign the contract for lease.

You really need to take contract laws, hire a attorney, or the realtor will steam you right over with this nonsense.

Sorry Malcolm, but I'm with Space_Acer on this. Forking over serveral thousand dollars to someone who hasn't even signed the offer is idiotic. I can understand a small deposit to cover contingencies once it's a done deal, but not before.

What I said is correct. Contract law is flexible and you can structure a deal anyway you want as long as you both agree.

A seller will not accept an offer the way you describe. Unlike most posters here, I have been on both sides. I have bought 5 properties, and I have sold 4.

Despite the market being very weak right now, when a house is priced at a true market value there are more than one interested party. The problem I have with some of the comments is people think they are the only one interested in the property, and want the law to protect them yet not have any obligation to keep their word. This seems selfish to me, but beyond that when you try to come across as a tough guy negotiator that is the time you are likely to screw yourself up.

Rather than being adversarial since this thread is negotiation, I'll say that the best deals I've done are where both sides understand the other. If either side is screwed then it wasn't really a fair deal. When people talk about wanting to shaft a seller they come off as hypocrites when they then start whining about a buyer getting the shaft. We are now in a buyer's market so the other comments about the seller doing this or that are becoming less relevant. Times change, and so does the power positioning. The art is to learn how to recognize what is going on and act accordingly.

Like I said Harm, it is a check that your agent holds until acceptance. You are not forking anything over until the deal is signed. Only after escrow opens is you money tied up in a neutral holding account.

Guys, this isn't what I think is right or wrong it is the way it is. If you want to make a deal you have to make a deal, it isn't one sided.

The seller has real costs, it isn't like they want to take your deposit and run off with it. If you tie the property up all month and then back out at the end, he still had to make a mortgage payment.

I realize this may not be exactly "apples to apples" but look at all the poor schmucks in FL that put down 100K deposits and now the majority of their communications w/the builder are through the builder's attorney!

The projects have been cancelled (or certainly not moving forward) and now people are being told they should've read the "fine print". I have bought and sold several homes in my time and have NEVER put up more than $500 earnest money (no I don't give a rip what's "standard") nor have I ever asked for more than that of a potential buyer.

"he still had to make a mortgage payment"

Well it wasn't like the seller didn't have the use of the property and if he wasn't making the mortgage payment "there" it would have been somewhere else.

In the end (and yes, I realize I've said this before) BUYING IS THE EASY PART!!! (It's selling that is hell) Anybody can "buy" something. This is the way it should be.

My favorite Lereah quote today:
“Our view is that the tightening in the subprime market will have a negative impact on home sales,” Mr. Lereah said. “It probably won’t postpone the recovery (in housing) but it will slow it.”

Let me get this straight. It's not going to postpone it, just slow it. Uh... What? So it'll get here on time but not as quickly as it might otherwise? Or, um, it's starting now but the relative speed is such that you may not notice it's arrival at all? Huh?

Is this dude an economist or a lawyer?

The seller has real costs, it isn’t like they want to take your deposit and run off with it. If you tie the property up all month and then back out at the end, he still had to make a mortgage payment.

As DinOR said, it's not like the seller is really losing anything when the buyer backs out, except time. He still has full use of his property/roof overhead.

And the risks are VERY lopsided in favor of the seller. The seller has a small risk of losing another qualified, willing buyer because the property was tied up a couple of weeks, but realistically what are the odds of that? An interested buyer is likely to still be interested two weeks later, unless he bought another house. And then there are plenty more where that one came from. What is the seller really risking here? Not making big enough fat $tacks? Not getting early retirement? Please...

The buyer, OTOH, is taking a very big risk --probably the largest financial risk of his life-- by agreeing to buy your McAlbatross, and may not be able to recoup his initial outlay if prices go down, or if forced to sell too soon (due to job loss, illness, divorce, forced relocation, etc.). These are not theoretical or even unlikely risks --they are very real, and becoming more and more likely with each passing day.

@newsfreak,

Classic quote yesterday on Ben's blog:

"Only in the housing bubble could idiots find a way to lose money they didn’t have in the first place."
--BubbleViewer

"As DinOR said, it’s not like the seller is really losing anything when the buyer backs out, except time. He still has full use of his property/roof overhead."

Not if he has already moved out and is paying for two places.
Also, the buyer has unlimited recourse to either force a sale or recoup damages from the seller breaching. The amount of earnest money is theoretically the extent the seller would be damaged by the buyer's default. I really don't understand the big deal here. What is wrong with holding a buyer to their word with a penalty clause? The additional month has a real cost to a seller who wants to sell. $500-$1000 used to be the norm for a deposit BTW, it is chump change in the big scheme of things.

And yes, the deposit is considered the seller's liquidated damages for the buyer not performing. Basically it is the limit of the buyer's responsibility. To answer the comment that no one ever keeps it, that is not so, I actually know an individual first hand who kept a $20,000 deposit on a condo in the early 90s.

As DinOR said, it’s not like the seller is really losing anything when the buyer backs out, except time. He still has full use of his property/roof overhead.

Most sellers are also buyers. If someone backs out, the seller may have the full use of two roofs. I never really had a problem with paying earnest money, but just the same, in the future I will be more aggressive about negotiation/minimizing it.

Tactics, that's a great word. Maybe we can shift a little here. Just bitching about something doesn't help anything, but if you start thinking like a businessman you can get what you want. Just sitting around saying, oh they don't have damages is arrogant, you don't know what their situation is.

Tactics - if you want a seller to take you seriously there are real tactics. Why $1-$5 thousand that you would lay out anyway is a big deal is beyond me, but you can strengthen you position by being a strong buyer. You want the best way to remove a deposit, remove the contingencies on the deal. Come in with your loan totally approved. You can do this before the offer is accepted, then you can set yourself apart and negotiate a lower deposit. Agree that the house is sold as is with a warranty and no other work is going to be requested. When you think like the seller, you will get the best deal.

"The seller has real costs, it isn’t like they want to take your deposit and run off with it. If you tie the property up all month and then back out at the end, he still had to make a mortgage payment."

LOL! I can say for myself only ... I dont give a flying fig what the seller has to pay. Im not here to help his *$$ get out of a problem.

Sign the contract here is the deposit. Never give any money until you sign a contract first folks. And make sure your deposit is refundable. Its your money..

Newsfreak, I knew you knew that but it is a common misconception. Like you said, realtors will basically lie about that to get the offer written up. 'oh it's not like anyone ever keeps the earnest money, you can always change your mind.'

The offer has contingencies which basically guarantee you will get your money back. You normally have 2 weeks for your inspections, anything you don't like is grounds to back out. Also, you normally have a loan contigency. The only way you would lose your deposit is if you act dishonestly, in which case you rightfully deserve to lose it.

So if you don't give a flying F about their situation, why should they care about your concerns, you are the one who wants to buy their house. Presumably because they have desperately lowered the price to where it is a deal for you.

LOL! I can say for myself only … I dont give a flying fig what the seller has to pay. Im not here to help his *$$ get out of a problem.

If you were selling to yourself I think you would demand a deposit.

The balance of power has definitely shifted. That's why I don't understand people who don't know how empowered they really are.

I had a similar experience as you, that's why I can vouch that there is a real cost to having someone stroke you.

Peter P man, please unmod me while it's first in the list.

"Lke I said Harm, it is a check that your agent holds until acceptance. You are not forking anything over until the deal is signed. Only after escrow opens is you money tied up in a neutral holding account."

I can only speak for myself...

You never hand over any money to anyone without a signed contract. Otherwise your in court telling your side vs other side. Period... there is no way you can prevent the agent from cashing it. What are you going to prove in court? Verbal agreement? Come one ...

What you also prove when people are 'unaware' .. your a pushover...

Please folks get a RE attorney... better to spend $300 than loss $20,000.

Like Patrick always said, RE Agents are not your friends...

You tell the agent ... No signed contract no Dnaro!

So long as I get to ride there in FAB's car.

John F,

I agree, most sellers ARE also buyers! But here's the big difference, there was a time when sellers were willing to wait UNTIL their home sold before moving on to their next home.

I'm a pretty aggressive investor and I've done some gutsy things in my time but for the life of me I can't see jeopardizing your family's financial future by committing to two mortgages at the same time! Why set yourself up to be the "human interest story" for USA Today? My folks were in their 60's and rented for about a year and a half when they first moved to Oregon back in the 80's. But now couples still raising kids can't be subjected to the 'humiliation' of renting EVER again? Who is it here that is wanting their cake and eating it too?

Then we wonder why this has become such a stressful, "high stakes" game?

(2nd attempt; trying to evade spamfilter; where's JukuBot when I need him?)

* My lawyer structures the “Offer to Purchase” with addendum to the standard form that specifically address the earnest money and escrow obligations. (something to the effect of ‘#6 DEPOSIT: I have deposited the sum of $cash earnest money to account #123ABC, held in escrow of your acceptance of this offer….legalese)

* Before my last round of offers I opened a neutral escrow account before writing the first offer. You don’t need a real estate agent to open escrow, nor do you have to designate the other party. They are all too happy to earn interest on your money.

to wit,

Setting Up Escrow

Setting up or “opening escrow” involves simply visiting the office of the escrow or title company which you have selected and handing over the deposit monies and giving instructions for the transaction. That is all there is to opening escrow. It is something anyone who’s involved in the transaction may do - the buyer, the seller, the lender, or the real estate agent. It doesn’t matter who opens the escrow just so long as those involved in the transaction have designated someone to do it when they sign the final purchase agreement. If there is no real estate agent involved, the seller will typically be the one to start the escrow process, as she will be holding a deposit or good faith check from the buyer, together with the signed purchase agreement. In for sale-by-owner transactions, the buyer and the seller may both open escrow.

* The seller may verify the deposit is already in escrow.
* The offer is severely time-limited.
* The offer also has language that allows me to select one seller from among up to 3 if I have submitted offers on multiple parties, but sellers may counter propose.
* Sometimes I drop the previous clause and instead substitute a “counter proposals will not be considered and are hereby preemptively rejected” clause. I do this only if I am offering my maximum price on a clean offer from the outset, and don’t want to waste time. Usually this is also a longshot situation where I’m hoping the seller is desperate. The expiration on this type of offer is 24 hours.

The purpose of this mechanic is it allows me to control the symbolic deposit dance. I’ve already demonstrated more commitment than a check with a clown and balloons drawn on it. And I’ve signaled to the selling agent that I am serious, not some random ZipRealty.com lowball fisher, and that I have representation. Finally, I have stipulated a time period at which point the escrow expires and reverts to me, giving me a known fixed window during which time I am highly motivated to find a deal. I should also mention that my earnest deposit is significantly greater than the customary minimum. This prevents me from just f-ing around lowballing since I’m losing opportunity cost on that money.

All that said [injected for DinOR] none of this means anything if my maximum price is not greater or equal than the seller’s minimum price. Also it risks causing damage to myself in the incestuous and collusive South Marin realter racket, as I could find myself blacklisted. Early on (before I had everything above worked out just so) I had an agent tell me that “we’ll never sell you a house in Marin if you keep wasting everyone’s time”. She also told me Marin realtors never sell to anyone without an agent as a matter of ethics [ironically].)

Period… there is no way you can prevent the agent from cashing it. What are you going to prove in court? Verbal agreement? Come one …

The check is written to the escrow company, not the agent. Look, you seem like a nice enough person but you obviously have never done a deal like this.

(3rd attempt; trying to evade spamfilter; where’s JukuBot when I need him?)

* My lawyer structures the “Offer to Purchase” with addendum to the standard form that specifically address the earnest money and escrow obligations. (something to the effect of ‘#6 DEPOSIT: I have deposited the sum of $cash earnest money to account #123ABC, held in escrow of your acceptance of this offer….legalese)

* Before my last round of offers I opened a neutral escrow account before writing the first offer. You don’t need a real estate agent to open escrow, nor do you have to designate the other party. They are all too happy to earn interest on your money.

to wit,

Setting Up Escrow

Setting up or “opening escrow” involves simply visiting the office of the escrow or title company which you have selected and handing over the deposit monies and giving instructions for the transaction. That is all there is to opening escrow. It is something anyone who’s involved in the transaction may do - the buyer, the seller, the lender, or the real estate agent. It doesn’t matter who opens the escrow just so long as those involved in the transaction have designated someone to do it when they sign the final purchase agreement. If there is no real estate agent involved, the seller will typically be the one to start the escrow process, as she will be holding a deposit or good faith check from the buyer, together with the signed purchase agreement. In for sale-by-owner transactions, the buyer and the seller may both open escrow.

* The seller may verify the deposit is already in escrow.
* The offer is severely time-limited.
* The offer also has language that allows me to select one seller from among up to 3 if I have submitted offers on multiple parties, but sellers may counter propose.
* Sometimes I drop the previous clause and instead substitute a “counter proposals will not be considered and are hereby preemptively rejected” clause. I do this only if I am offering my maximum price on a clean offer from the outset, and don’t want to waste time. Usually this is also a longshot situation where I’m hoping the seller is desperate. The expiration on this type of offer is 24 hours.

The purpose of this mechanic is it allows me to control the symbolic deposit dance. I’ve already demonstrated more commitment than a check with a clown and balloons drawn on it. And I’ve signaled to the selling agent that I am serious, not some random ZipRealty.com lowball fisher, and that I have representation. Finally, I have stipulated a time period at which point the escrow expires and reverts to me, giving me a known fixed window during which time I am highly motivated to find a deal. I should also mention that my earnest deposit is significantly greater than the customary minimum. This prevents me from just f-ing around lowballing since I’m losing opportunity cost on that money.

All that said [injected for DinOR] none of this means anything if my maximum price is not greater or equal than the seller’s minimum price. Also it risks causing damage to myself in the ince$tuous and collusive South Marin realter racket, as I could find myself blacklisted. Early on (before I had everything above worked out just so) I had an agent tell me that “we’ll never sell you a house in Marin if you keep wasting everyone’s time”. She also told me Marin realtors never sell to anyone without an agent as a matter of ethics [ironically].)

It has nothing to do with being a pushover. If two deals are identical you would go with the one with the highest deposit and least contingenices. That's what I mean by think like a seller. The seller just wants to sell the house, they aren't trying to screw you out of anything. What is with this paranoia?

(the winner was "ince$tuous", for future reference)

athena,

I would be only TOO proud to table an embarrassingly low lowball offer on your behalf! (Trust me, I've been called every name but the one my mother gave me) so what makes you think I give a rip about what some FS (TM) (Frustrated Seller) thinks! :)