Tuesday, September 6, 2011

Why is Good-faith deposit important to make a real estate bid?

I'm dealing with several buyers at the moment, and explaining the offer process to my them. One of my favorite parts of that conversation, is that fun discussion about earnest money. For me, it's often a chance learn about buyer expectations and also to see how the transaction might go.

Often, I even find myself explaining earnest money to buyers who have bought in the past. We sell homes every day, but they purchase homes probably every five years or so at the most. Last week, I was explaining the process of earnest money to a client looking at a luxury home.  Sometimes buyers don't see why this is necessary.

In Hoboken, we generally only ask for $1,000 earnest money in order to put in a bid.  In other states the earnest money just to make an offer can a percentage of the offering price - 2-3%.

This particular client was quite straight forward, so I gave him the line I give all my buyers eventually- the sellers want to make sure you have some skin in the game.

But I found myself thinking back to the heady days of 2001-2007. You remember them- no doc loans, your auto mechanic giving you his new card that read mortgage broker, and buyers who seemed just a bit overly concerned, about how long it would take for the title company to cash their earnest money check.

There was a particular mortgage broker that used to send me business. One of his favorite things to say to me, was that I *sure do ask a lot of questions.* It seems that I asked a lot of questions of him, and I sure did of the folks he sent my way. A gift horse is one thing, but scrutinizing someone who might waste my time, and unknowingly theirs, is completely within bounds. His folks were preapproved, and I would find out after a few questions, because he felt he could get anyone done. But being the curious and informative person that I am, I would always tell them about costs associated with a purchase before closing.
Earnest money, inspections, appraisals etc. The broker in mind would wrap the appraisal in closing. Most would ask me if they could waive inspection. And then there were the requests to write an offer with $100 in earnest money. Paying for the appraisal really wasn't my concern. If you want to waive inspection, I highly advise against it, and you will sign every document I can think of to cover my backside. And then a few more for good measure.

But the red flag requests for low earnest money got my skin in the game speech, and my belief, that this wasn't the sort of business I wanted. I'm bullish on home ownership to say the least. But if you can't pay the fees associated with buying a home, for fear the rent payment or day care check will bounce, perhaps it's good, to sit this game out.

I stopped working with that mortgage broker's clients, when they became more unqualified, and his tactics became shadier. He isn't in the business anymore, which isn't a surprise. The strange thing is, I've met agents who had similar experiences during those crazy times.

Home ownership is great. And lending practices and home buying will loosen up again. America is a cyclical country, and we will have creative financing, and a push for home buying again. And yes, much of it will be artificial. But the thing to remember from a real estate professional standpoint, is that your clients should always have some skin in the game.

Provided by Donna Antonucci
Prudential Castle Point Realty