Credit Crunch Fallout

Earnest Money Tug-of-War?

When is it really a "done deal?" I tell my Sellers, "at closing, once you have the cashier's check in hand."*

And when is the Buyer's loan really good-to-go, in a national real estate market characterized by shrinking credit, tightening loan standards, and, in many places, steadily falling prices? My answer is, "when it's wired to the Seller's closing company."

I am hearing and seeing increasing anecdotal evidence that, up until then, the Buyer's money is not a sure thing. That's significant not just because blown financing causes blown deals, but because who's at fault determines who gets to keep the earnest money. Depending on the size and terms of the deal, that can be anywhere from $2k to $25k or more.

As things stand now in Minnesota, once the Buyer's lender signals that the appraisal is complete and that no major conditions remain, the Seller gets to keep the earnest money if the Buyer doesn't close.

However, what happens if a nervous lender subsequently "moves the goal posts?" That can mean requiring more money down, reducing the amount they are willing to lend, requiring additional documentation -- or some combination thereof.

Except for all the other involved parties, this would seem to be a private, contractual matter between the Buyer/would-be borrower and their bank. However, residential real estate deals are often like domino's, and one busted (or even delayed) deal can affect numerous others, with multiple financial consequences.

Hopefully, this potential headache can be headed off by timely changes in the Financing Addendum, the document that governs all these issues. After all, it would certainly be ashame if the only people making money in a down real estate market were . . . the lawyers.

*And the cashier's check is not drawn on IndyMac Bank!