Overview
Chapter 21 outlines the procedures and responsibilities for Georgia real estate licensees in handling earnest money, including definitions, negotiating amounts, proper handling methods, and disbursement requirements.
Definition and Purpose of Earnest Money
- Earnest money serves as a buyer’s initial show of good faith but is not legally required for a contract.
- The broker or seller may request earnest money to reduce risk of buyer breach.
- Earnest money may be retained as liquidated damages if the buyer defaults.
Determining the Amount
- The amount is negotiable between buyer and seller, often guided by firm policy or specific seller requests.
- A higher deposit provides more protection; a lower deposit may increase the risk of buyer withdrawal.
- All offers—regardless of earnest money amount—must be promptly presented to the seller.
Earnest Money Clauses in Contracts
- Contracts usually include a clause specifying the holder, amount, and disposition of earnest money.
- Sales associates must have broker approval before using sample contract provisions.
Handling by Sales Associates and Brokers
- Sales associates must deliver earnest money to brokers promptly following broker-defined procedures.
- Brokers must provide written procedures for turning in earnest money and instruct associates accordingly.
Acceptable Forms and Handling of Earnest Money
- Earnest money may be cash, certified check, personal check, or other valuables.
- Cash deposits pose security risks and IRS reporting is required for cash over $10,000.
- Personal checks must be carefully reviewed for details; unusual cases must be noted in the offer.
- Earnest money may rarely be property or services, requiring clear contract description and value agreement.
Responsibilities and Timely Deposit
- Brokers must deposit earnest money immediately into a designated trust account unless written authority states otherwise.
- If instructed, brokers may hold an earnest money check pending contract acceptance.
- Buyers insisting on interest-bearing accounts must have all parties agree in writing on interest disposition.
Special Circumstances: Postdated Checks
- Postdated checks are discouraged, but if accepted, full disclosure to the seller is required.
- A preferred option is smaller initial earnest money with an agreement for additional payment later.
Disbursement of Earnest Money
- Earnest money is refunded if an offer is rejected or withdrawn prior to acceptance.
- Contingency failures, closing, or contract termination all trigger specific refund or credit procedures.
- If closing does not occur and the parties disagree, options include interpleader action, court order, or reasonable contract interpretation after legal counsel.
Prohibited Actions and Sanctions
- Disbursing earnest money contrary to the contract is deemed incompetence and subjects the broker to commission sanctions.
Action Items
- TBD – Brokers: Establish and communicate written procedures for receiving and handling earnest money.
- As required by IRS deadlines – Brokers: File IRS Form 8300 for cash transactions over $10,000.
- Promptly – Sales associates: Turn over all received earnest money to the broker as soon as practicable.
- TBD – Sales associates and brokers: Obtain broker approval before using sample clauses in contracts.
- TBD – Brokers: Notify all parties in writing if funds are disbursed without unanimous agreement.