Earnest money is a certain amount of funds given by the Buyers to either the Sellers or an Escrow Agent, who holds the funds in trust. If Buyers close on the property, these funds are applied to the purchase price at closing.
There are a number of reasons why Buyers submit earnest money along with, or very shortly after, signing the contract for the purchase of real estate. Among them are:
- In Missouri, a contract for the sale of real property, in addition to being signed by all of the parties and certain other requirements, must also be supported by “consideration.” Consideration must be something of value in order to bind the parties to the contract. Funds changing hands in the form of earnest money is the most common method of consideration used.
- If there is a breach of contract, the earnest money can become a matter of negotiation to allow the parties to part ways. For example, if Buyers improperly terminate the contract, many contracts allow Sellers to keep the earnest money as Sellers’ remedy for Buyers’ breach. Sometimes this is the exclusive remedy for Sellers, and sometimes this is in addition to the right to sue for damages or other rights. (For more information on Seller remedies, read this post).
- Earnest money shows Sellers that Buyers are serious about making this purchase and are willing to put cash up to demonstrate their seriousness. In a situation where there are multiple potential Buyers, each vying for the right to purchase the property, one criterion Sellers may consider in determining which contract to sign is the amount of earnest money submitted. That way if those Buyers breach, Sellers have an expectation that they are likely to at least get that amount of the earnest money deposit for their troubles and for taking the property off the market.
It is common in Missouri for the title company closing on behalf of Buyers to hold the earnest money deposit. For the title company to release the earnest money prior to closing or in a failed deal, both Buyers and Sellers generally need to agree in writing to this. Otherwise the title company may deposit the money with the local county court to protect itself from liability.