It’s not a good time to look at this issue from a hindsight perspective. In this changing market, we need to revisit this topic and talk about how a changing market may influence your decisions and actions in 2008.

In a hot market, the instances of the seller wanting to keep your Earnest Money are fewer. When there’s another buyer standing in line behind you, sellers will often simply say NEXT!

But when buyers making offers are fewer and further between, you will see more sellers wanting to keep that Earnest Money. Time to address this topic from a forward thinking perspective in “better safe than sorry” fashion.

Step 1) The amount of the Earnest Money. When a buyer makes an offer they “put up” Earnest Money. Most buyers will ask, “How much does it NEED to be?” That is really not the way to look at it. Instead ask yourself, “How much am I willing to LOSE?” The purpose of Earnest Money is to get some skin into the game. It’s how you show the seller that you are making the offer “in earnest” and willing to proceed “in good faith” to closing. So DO NOT write that Earnest Money check expecting to get it back if you change your mind! You never should have of course. But it may become more likely in 2008 that sellers will want to keep that money, than they did in the last 4 years or more.

NEW RULE! Don’t write that check for an amount more than you are willing to lose, if you simply change your mind about buying that house. The seller and seller’s agent may counter and ask for more, as they should if it is low. But don’t agree to an increased amount until you again ask yourself, “am I REALLY willing to LOSE this much if I change my mind?”

Step 2) Choosing Your Closing Agent (Escrow) In a Seller’s Market you will often see instructions from the seller’s agent regarding which Title and Escrow Company you are to use when writing an offer. In a hot market you likely won’t want to lose the house arguing over this point. But when you are the only offer in the room on a house that has been on market long enough to feel comfortable that you can bargain in a reasonable manner, choose your escrow company wisely.

Whether it is the Closing Agent or the Real Estate Broker holding your Earnest Money, you want to make sure that they honor unilateral rights to cancel BEFORE you agree to make out that Earnest Money check payable TO them.

So what does that mean? It means sometimes the buyer has a unilateral right to cancel, but the escrow holder has an “internal policy” of requiring the signatures of both parties to release the Earnest Money. Many, if not most, very large escrow companies do not want to take the risk of releasing the Earnest Money to the buyer unless the seller agrees. Sometimes you need the seller to agree and sometimes you don’t. If the escrow holder won’t give you the money because of their internal policy vs. the Purchase and Sale Agreement, you may find yourself talking to a wall instead of getting your money back.

NEW RULE! Pick not only your escrow company, but also speak with your closing agent BEFORE writing that Earnest Money check. Ask your agent writing the contract for your “legal out” addendums in advance. For example, if you are buying a condo, ask for a copy of the blank form you would use to cancel based on the resale certificate. Ask for the form you would use to cancel based on the Form 17 (and do not waive your right to do so in advance). If you have an Inspection Contingency, ask for the form that you would use to cancel based on the Inspection Congingency. Whatever your legal outs, know that most will expire early in the contract. So mark down the drop dead dates of your rights within these legal outs.

Notice whether or not the form requires only your signature to release the Earnest Money, or the signatures of both the buyer and the seller. Let’s assume that these forms only require the signature of the buyer, and the buyer has the unilateral right to cancel. NOW call the proposed Earnest Money holder and verify that they WILL in fact return your Earnest Money with only your signature, in the event you cancel based on one of these uniteral addendums.

If and when you ask someone to agree, they think they have the right to not agree. So if you have say 5 days to cancel, you don’t want the seller to have to agree with your decision in order for you to get your money back. If the escrow company won’t give you your money based solely on the Purchase and Sale Agreement and it’s addendums…well let’s just say you don’t want to be in that position, so know that up front and before you give them your money.

It is not a good time to “go gentle into that good night” and simply not care who the escrow company will be. While you should be prepared to lose your Earnest Money in some cases, one of those cases is not because of an internal escrow company policy.

Do not rely on your Finance Contingency as a means to change your mind. Return of Earnest Money based on the Finance Contingency is rarely, if ever, covered under a unilateral rescission right, as are some other areas of the contract. Often if not always, the seller needs to agree to the release of Earnest Money if you are cancelling based on the Finance Contingency. It’s a good idea to be pretty darned sure you CAN get a mortgage before making an offer. The protection of earnest money often does not go all the way to closing, and so if the loan doesn’t fund at the end on a day that is not covered by the Finance Contingency, or if you didn’t to EVERYTHING in a timely manner…you need to consult an attorney. Sellers will be less likely to say “oh well” in a Buyer’s Market than in a Seller’s Market.

3) When you SHOULD lose your Earnest Money. If you change your mind about buying the house because you have now decided you don’t want it, the seller should keep your Earnest Money. That is the purpose of requiring Earnest Money. You promise to buy the seller’s house, and if you change your mind he gets to keep the Earnest Money. You say, “Here’s $5,000. This is proof that I do ‘sincerely and in earnest’ want to buy your house. If I change my mind, you get to keep that $5,000.” That is what Earnest Money is all about.

Some will say the seller wasn’t damaged, so why should he keep a dime of my money? You have two elections in the contract. “Forfeiture of Earnest Money” or “Seller’s Election of Remedies”. Most times the contract calls for “Forfeiture of Earnest Money”. That means the seller gets your money…period, if you “default”. The seller doesn’t have to prove he was damaged, nor does he even have to be damaged. To talk about damages, you have to have been willing to risk MORE than the Earnest Money at the time you made the offer, and most people don’t do that.

Most people don’t want to pay the seller’s full damages, nor do the want to forfeit their earnest money. So really they want an election that says, “None of the above! I just want my money back!” Doesn’t work that way.

You will see more and more sellers wanting to keep that money than in the past. Why? Because another buyer is not as easy to come by as it was in the last few years. Before you go to an attorney to get your Earnest Money back, maybe you should first look at yourself in the mirror and ask yourself if the seller should get to keep it. If you just changed your mind, “without legal excuse”, remember that is why you put that money up in the first place.