Earnest Money in NYC: Facts You Must Know About It

By: Abdullah Haroon

Apart from local laws, buying and selling have the same culture across the globe. Similar traditions and conventions run through the system all over the world. Earnest money is one of the prime examples of it. Though the trend is not as common in NYC as in the rest of the world, still, it is practiced here as well.

What is Earnest Money?

In simple words, it is token money that buyer gives to the seller or seller’s agent as a statement to show the intentions for buying the property. It is also called a binder: the money submitted to the seller’s agent for the purchase of the specific property.

The Major Take Away:

It is an amount submitted to the seller’s agent out of good faith to show interest and intentions in a certain property.
The money is deposited into an escrow account and included in the down payment towards the closing of the deal.
There is no set percentage for earnest money and remains at the convenience of the buyer.
There is no legal obligation for earnest money in the NYC local laws.

It is also practiced when dealing with a rental property not merely purchasing.

Earnest Money – A Convention:

If we peek into history, we would notice that it had been the common practice to pay the earnest money before striking a final deal. Laws are the recent developments and back then one would show the interest verbally and submit the token money to the seller. In the historical context, earnest money was the statement that the property is sold to the person who has given the earnest money.

With the development of law and modern departments. They replaced the practice and now everything is taken in written form and only that carries the legal value. But still, it has been in practice though it holds no legal value.

From a legal perspective, the buyer has no obligation to pay earnest money. If asked about it then instead of giving earnest money. Ask to expedite the process of the deal and submit the down payment after striking the deal. You may enter into an under contract meanwhile instead of submitting earnest money. If you feel like giving it in good faith, you may proceed with it.

The Philosophy Behind Earnest Money:

Earnest money may have lost the shine now but it used to be the important factor in all of the sales and purchases let alone property, though it was more commonplace in the real estate sector.

If we peek into the cultural archives, there used to be a habit of people to look at multiple sites when hunting for a new home and show intentions for many properties verbally. That would stop the seller from showing the property to new people while that buyer would buy one and thus wasting the time of the rest of the sellers.

To discourage this habit, the idea of earnest money was coined so that only the serious and potential buyers come forward. As a human instinct, no one bothers to submit earnest money when he knows deep down that he is not interested in the property. Plus, it was also non-refundable money in case the buyer steps out. So it proved highly effective and made it possible to regulate the process smoothly.

Is It Legally Binding?

A common perception about earnest money is that one gets bound by the law when earnest money is given. Well, there is no such binding in the local law of NYC. Both parties are only bound when the written agreement is done between them and signatures have been taken.

As a common practice, the buyer submits a certain percent of the price as a ‘contract deposit’ to the seller’s lawyer who keeps it until the final agreement and transfers it to the seller. Under normal conditions, it is generally not refunded but one may exploit the situation if needs to be returned.

One of the safest options is if there had been any contingencies in the under contract from either side and that has not been fulfilled, there is a clear path to back out. Another option is if the bank declines the loan application of the buyer then obviously, he won’t be able to buy the property. Or if your application is rejected by the co-op board for reasons unknown to you.

Note: Whenever you want to execute any backup plan, you need to consult your lawyer first to avoid any trouble in case the seller pursues the case.

What Happens With Earnest Money When Submitted?

Whether you would get your earnest money refunded depends on the outcomes of that specific deal. If you go with your decision, your money will be adjusted in the closing costs while if you walk away from a deal without reason which has anything to do with the seller, you would lose your earnest money.

However, if the seller decided to break the deal, you would get your earnest money back.

Conclusion:

If we look at the philosophy behind earnest money, it seems quite logical to have a convention of earnest money. However, local laws have effectively replaced this practice. And if you want to submit earnest money, it would be better to get things in written form.