Published: May 14, 2008 11:41 am            

Tax rebate + right deal = New home

One of the many hoops that a home buyer must jump through is the payment of “earnest money” to the home seller.

In the real estate business, earnest money is the check or cash a buyer puts down to purchase a home at the time the contract is signed. In this age of 100 percent mortgages and seller paid closing costs the idea of having to put down earnest money on a house doesn’t sit well with a lot of potential home buyers. The problem is many home buyers have a hard time finding the utility of allowing someone else to hold such a large chunk of their hard earned money until such time as the deal actually closes.

Part of the frustration stems from the fact that there is just no getting around earnest money. Every binding contract requires consideration, and a contract to buy a house is no exception. Earnest money is simply the best mechanism we’ve come up with to satisfy that fundamental rule of law.

The rest of the frustration could revolve around the word “consideration.” This is because the consideration a contract requires has a different meaning than the consideration given when you open a door for someone or when you say good morning to your neighbor. The latter examples are akin to good manners while the former generally requires cold hard cash.

Now that earnest money has been explained, how much is the right amount to pay?

The usual complicated answer is “it depends,” but today’s market is less complicated thanks to current market conditions. Fortunately for home buyers the amount of earnest money required to purchase a home has dropped tremendously of late. Just two years ago, during the white heat of the seller’s market that endured between 2001 and 2006, earnest money deposits were as high as 5 percent of the sales price or more. These large amounts were required to not only show the seller that a buyer was seriously interested but also to stave off other potential buyers waiting in line.

All that has changed today as we are now in a buyer’s market where as little as $500 or $1,000 is acceptable. The feds know this to be true so it is not just coincidence that the 2008 Tax Rebate Stimulus Package will issue checks to qualified individuals for $600, and $1,200 to couples (if they have children, add $300 per).

This will be more than enough to provide millions of households with the pocket money needed to break through what has become a major hurdle for the average home buyer, earnest money. So think big when you open up your stimulus check from Uncle Sam this week because it just might be enough to put you in the house of your dreams.



J. Tyson Ross is an attorney at Minor, Bell and Neal, P.C. Ross can be reached at tross@mbnlaw.com.

        

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