Now what exactly do I mean by that title, you're probably asking? Well, it's pretty simple: Earnest Money (EM) deposits should be held until such time that your deal closes or your Buyer forfeits their EM for some reason. It's as simple as that. I mean EM deposits that you personally receive for properties that you own or control and you receive the deposit from a prospective Buyer. If you've written a non-refundable Earnest Money clause in your contract that still means that you must perform your end of the deal.
Now, while this is a straight forward professional concept, there are some people that treat Earnest Money as lottery winnings or use them for shopping sprees, payment to contractors for work on other properties or the like. I've seen it happen and that's why whenever we have a deal, we always try and use our own Closing Attorney or people that we trust to close but regardless, we always use a third party escrow Closing Agent.
We never give EM deposits directly to Sellers and you shouldn't either! Always use a bona-fide third party Closing Agent who is registered with the State they're doing business in and holds a valid license to close. Do your due diligence on your Closing Agent just like you do on your properties.
If you ever collect a direct EM, do NOT do anything with the EM deposit because you will run into problems eventually that may not be feasible to dig your way out of. Title problems, probate problems, conveyance problems such as Fannie Mae deed restrictions etc., etc. There are countless problems that may occur that can prevent closings or delay them.
A deal is almost like a car. There are many moving parts and they all have to fit exactly right, or it won't work. There are smooth deals, and there are deals from the pit of hell that will drive you nuts. Regardless, if you're a real estate investor and you've done enough deals, you'll see them all. Doing deals is not just a bowl of cherries like the gurus' make it seem. This is real life, it's working in the trenches, and you're gonna get mud on your face once in a while and you're gonna deal with problems. If you don't believe me, then you're new or you're just not doing enough deals.
In doing your deals, do not misappropriate Earnest Money. This is not your money until it's "YOUR MONEY". If the deal falls apart on your end, you will most likely have to refund the Earnest Money. Make sure it's where it's supposed to be and do not treat it as yours until the deal closes or it's forfeited to you.
You'll find that you cannot anticipate everything that may occur in a deal and you may have to give back that EM. By not touching the EM deposits until closing actually occurs or unless the other party forfeits it by contract, potential EM problems can be pretty much eliminated.
Wishing you a great and prosperous week!
Until next time....