When Oscar Wilde penned “The Importance of Being Earnest” in the early 1890s, he displayed no prescience relating to real estate matters in 2014. There is no importance of being earnest money these days. Even if the currency is Bitcoin.

Earnest money refers to the funds that buyers deposit in escrow to ensure sellers that the buyers are entering into the real estate contract “in earnest.” When offers are submitted, many Realtors explain that the earnest money will be held in escrow. If the buyer defaults, the seller can keep the earnest money. That was a more accurate assessment of matters in the past than now.

The Tennessee Association of Realtors (TAR) has designed what is now the contract of choice for most Nashville real estate firms – more on that later – and it states the following:

“Holder shall disburse Earnest Money (note the upper case treatment of the term, seemingly indicative of importance) only as follows:

• at Closing (now that is important) to be applied as a credit toward Buyer’s Purchase Price;

• upon written agreement signed by all parties having an interest in the funds;

• upon court order or arbitrator having jurisdiction over any dispute involving earnest money;

• upon reasonable interpretation of the Agreement; or

• upon filing of an interpleader action with payment to be made to the clerk of the court having jurisdiction over the matter”

It goes on to say that the holder may deduct fees, etc. and there will be fees and court costs in order to resolve the matter if (b) does not happen. Section (b) is the rub. Getting the party that is going to lose the money to cave without a fight is not easy.

There is a chain of events identified in most real estate contracts, and the TAR contract is rife with buyer-friendly contingencies. In most contracts, the seller agrees to allow the buyer to make the contract contingent upon the following:

• Appraisal

• Inspection

• Financing

If the property does not appraise for the sale price, the buyer can walk. As a matter of fact, the TAR contract states “Buyer may terminate this contract by providing written notice to Seller…” and goes on to state “Upon termination, Buyer is entitled to refund of Earnest Money.”

It should state buyer is entitled to Earnest Money if Seller will sign the release form, as that is the only way the buyers are going to have their earnest money refunded.

As for the inspection, the contract states: “In the event that Seller and Buyer do not reach a mutual written resolution during such Resolution Period…. this Agreement is hereby terminated. Buyer is entitled to refund of Earnest Money.” Entitled to and receiving the earnest money, once again, are two different issues. The Seller must release the earnest money.

I will spare you the quotation from the loan paragraph, but it states that the contract is subject to loan approval and that if the lender declines the loan and sends written notification, the contract is terminated and earnest money will be refunded. That is not necessarily true.

In the cases involving first-time homebuyers, or anyone low on cash, the buyers are unable to pursue other properties until their earnest money is refunded since they have depleted their cash. While the aforementioned examples of the unimportance of earnest money reveal how difficult it can be for buyers to retrieve their moneys, for sellers it can be worse.

Let’s walk through a transaction:

• The seller sells his house, or “gives it away,” in their opinion.

• Nervously, the sellers await the inspection.

• The buyers “nitpick” and demand a number of repairs

• Reluctantly, the seller concedes.

• The appraiser visits and “stays too long,” according the seller, then calls the listing agent in order to determine what comps were used to price the sale, since the price looks a bit “aggressive’ to the appraiser.

Miraculously, the home appraises for the sale price and, shortly thereafter, the lender issues an approval letter with a few CYA conditions, such as the buyer does not lose employment or borrow any money.

Yes, many buyers buy furniture or cars, accruing debt after approval only to find that a new credit report is generated prior to closing and the new report reflects the purchases.

Following loan approval, inspection contingency removal and the satisfactory appraisal of the property, the buyer decides not to purchase the home. In such case, the seller should be awarded the earnest money. Nope. Not unless the buyer signs the release.

In this example, an example of an event that occurs often, the seller has removed the house from the market for as long as 21 days in order to allow for the conditions of the contract to be satisfied and all contingencies to be removed, thereby losing all marketing momentum, and the buyer refuses to buy and will not sign the release of earnest money.

He’ll take his chances that the seller will not pursue the matter in court.

The legal advice that a number of attorneys have given sellers at this point is to make every attempt to settle the dispute outside of court, since legal fees may exceed the amount of the earnest money.

To further complicate matters the house must remain off of the market while the breach of contract case is being adjudicated. If the house goes back on the market, it cannot be sold to another buyer until the case is resolved.

After weighing the options, most sellers relent and offer to split the earnest money in some fashion allowing the would-be buyer to hit the street to torment another seller.

In order to give the earnest money importance, the sellers should suggest that new language should be added to the TAR contract. That will throw the buyers’ agents for a series of loops, as they are co-dependent on this contract.

There is an old adage: “Give a man a fish and he eats for a day. Teach a man to fish and he will eat for a lifetime.”

The same is true of the TAR contract and many Nashville Realtors. Teach a Realtor how to fill in the blanks on the TAR contract, and they will sell some real estate. Teach a Realtor to read any type of contract, and they can have a career.

Be you buyer or seller, make sure your agent gives your money the importance of being earnest.

Richard Courtney is a partner with Christianson, Patterson, Courtney and Associates and can be reached at [email protected].