When you are involved in a ‘For Sale By Owner’ (FSBO) real estate transaction, you should never give the money directly to the seller.
In most cases, the listing agent will hold the earnest money in their escrow account until closing.
However, if the sale doesn’t involve a real estate agent, you should arrange for a title company or Real Estate attorney to act as the ‘escrow agent’.
Many people sell their homes without hiring a realtor, as it can save them thousands of dollars. But that doesn’t mean you should forget about your financial security.
Let’s make it easy to understand:
What is Earnest Money?
Earnest money is the term given to a deposit made to a seller, representing the seller’s intent to sell the property to the potential buyer.
This money acts as a ‘good faith’ agreement, so the buyer can gain extra time to acquire financing, title searches and property inspections.
It is effectively a deposit for a home purchase and features a contract that details the requirements for a refund.
Earnest money deposits are usually valued at between 1-10% of the agreed property sale price.
Earnest money deposits do not require the buyer to purchase the property but require the seller to take the property off the market.
Using a Title Company to Hold Earnest Money in an FSBO Sale
A common alternative to using a realtor to hold earnest money in an FSBO sale is to use a title company.
Title companies can hold the money in an escrow account, protecting the buyer from fraud and allowing the seller to hold a deposit legally.
However, title companies are limited in their legal and contractual knowledge which may leave you open to undesirable conditions that lose the deposit.
Using a Real Estate Lawyer to Hold Earnest Money in an FSBO Sale
Alternatively, you can use a real estate lawyer to hold earnest money in an FSBO sale.
They will secure the funds in escrow, often in a trust account, until the sale is completed.
A real estate lawyer is seen as the optimal choice as they can handle many closing services, from contractual reviews and edits to legal advice and protection.
FSBO deals unfortunately tend to include inexperienced sellers who make stupid mistakes, wasting your time and money. If this happens, having a real estate lawyer on your side can allow you to take swift legal action to protect your interests.
An Example of Earnest Money
Imagine David wants to buy a property valued at $100,000 from Brian. To show good faith on both sides, they agree to a $10,000 money deposit. Brian agrees to move out of the property within three months. The money will be held by a Real Estate attorney as Brian wasn’t using a realtor.
However, Brian doesn’t move out because he struggles to find a new home himself.
Consequently, David backs out of the deal and is refunded his deposit.
Does Earnest Money Get Refunded in an FSBO Sale?
Earnest money deposits will get returned to the buyer if a condition listed in the contract is not met.
For example, if there is a significant flaw in the house, if the buyer backs out of the deal or if the appraisal price is lower than the sale price.
How Is Earnest Money Protected?
Naturally, you might be scared about handing money over to a seller who is acting without a real estate agent. But you can protect yourself as a buyer by taking precautionary steps.
Firstly, buyers should always include contingencies in the purchase agreement contract. This can protect the buyer from seeing their deposit forfeited in the case of flaws and unforeseen circumstances.
Read the Contract
Similarly, you should also read the terms of the proposed contract very carefully before signing. Terms such as deadlines, requirements and contingencies could work against you as much as for you. It’s advised that you work with a real estate lawyer to have your contract reviewed and, if needed, edited.
Secure the Money
Most importantly, you must ensure the earnest money deposit is in a secure escrow – so as a buyer, work with a reputable broker, title firm, escrow company or reputable law firm.
What Is an Escrow?
An escrow is a financial instrument where money (or an asset) is held by a third party, to protect both sides of the transaction. Think of it as a ‘middle man’, who will hold the money until the conditions of the agreement are met.
Earnest money is usually paid into a trust or escrow account via certified check, personal check or wire transfer.
In the case of a law firm, the funds will be held in the account until closing, upon which they will be used in the down payment and closing cost – unless a refund is necessary.
Escrow accounts can also earn interest. If the interest is over more than $600, the buyer must fill out a W-9 tax form with the IRS. A real estate lawyer can ensure you follow every step legally and without any errors.
- A third party should hold earnest money in an FSBO sale.
- Never send money directly to a seller in an FSBO transaction.
- Use a reputable escrow agent, such as a real estate lawyer at a trusted law firm.
- Include contingencies in your contract.
- Read the contract conditions before sending earnest money.
Contact a Florida Real Estate Lawyer
If you need any assistance with an FSBO sale or to secure your earnest money, then our Florida real estate attorneys can help. As one of the leading law firms in Florida, we are licensed to hold your funds until the closing stage of the transaction – keeping you and the seller protected.
Our St Petersburg and Riverview real estate attorneys at Battaglia, Ross, Dicus & McQuaid, P.A. will review your circumstances and ensure your transaction goes smoothly.