The last thing home buyers want to do is lose their earnest money deposit when buying a bank-owned home. Bank-owned transactions, called REOs, are handled differently than regular real estate transactions.
To make matters even more interesting, there is little conformity among REO lenders as to how each sale is processed. There is one common thread, though, among the foreclosure sales I handle in Sacramento, and that is a tightening of how earnest money deposits are handled.
How Earnest Money Deposits Are Handled on a Regular Sale
Most regular real estate transactions in California are handled the same, and it's similar throughout the country. A buyer makes the earnest money deposit payable to escrow, title or the real estate brokerage, and it's refundable to the buyer within the inspection period.
However, realize that the earnest money deposit is not automatically returned to the buyer until cancellation instructions are signed by both parties. Sometimes disputes arise, and that can delay the reimbursement.
Tips for Dealing With Earnest Money Deposits on Bank-Owned Homes
Banks don't want to get halfway through the escrow only to discover the buyer wasn't serious about buying the foreclosure. Therefore, banks want to limit the fall-out / cancellation rate and will make demands in the negotiation stages of the contract. Here are tips for dealing with REO lenders:
Make the Earnest Money Deposit Payable to Title.
If you make your earnest money deposit payable to a brokerage, and that check is deposited into a trust account, the brokerage will need to wait for the funds to clear before issuing a check to the title company. The bank may not wait for clearance.
The bank will most likely insist that the check be sent to title, so save yourself the grief and make it out to "title or escrow company," the name of which can be filled in later. This will prevent the brokerage from depositing the check.
Funds Must Be in the Buyer's Account to Cover the Check.
In one transaction, the bank insisted that the buyer deliver the check to escrow, and the buyer did. However, she forgot to transfer funds from her savings account to cover the check. It bounced.
The listing agent and asset manager insisted the buyer immediately wire funds. The buyer went to her bank on a Friday and wired the money, but the bank messed up and did not send out the wire. This buyer almost lost her bank-owned home because the bank wanted to cancel the deal. In desperation, she waived all her contract contingencies to save it, and the bank received the wire the following Monday.
Prepare to Replace the Earnest Money Deposit with a Cashier's Check Upon Offer Acceptance.
Some banks will demand that the buyer replace the original earnest money check with a cashier's check. If your banking accounts are held at out-of-state institutions, you may be unable to obtain a cashier's check immediately.
Be Ready to Immediately Overnight the Earnest Money Deposit to the Bank's Designated Title or Escrow Company.
Find out where the closest overnight carrier is located. Sometimes, escrow companies will let you use their account to send funds, so ask, but make sure those funds are sent overnight for next-day delivery. Get a receipt for tracking purposes in case the check doesn't show up on time.
Negotiate Earnest Money Deposits Below the Maximum for Small Claims Court.
If the worst happens and you end up in court, it's generally faster to take your case to Small Claims Court. However, most Small Claims Courts impose limits on the amount for which you may file a case. If your earnest money deposit exceeds the maximum amount set by the court and you still want to pursue the action in Small Claims Court, you won't receive the entire balance even if you win.
Time Your Negotiations for Non-Refundable Earnest Money Deposits.
Because some banks will make your earnest money deposit non-refundable, you may want to schedule your home inspections upon verbal acceptance of your offer. You may have less than 24 hours to conduct these inspections, so line up your inspectors beforehand and be ready to act the minute your agent tells you the offer will be accepted.
This way, you will have your inspections completed before you deliver that earnest money deposit. It will save you a lot of grief and worry if you know that you definitely want to proceed with the transaction before handing over the cash.
At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.