Buyer question - Earnest money - SailNet Community

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Old 09-11-2008
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Buyer question - Earnest money

What is earnest money actually for ?

Seems like the typical process for buying a boat through a broker is agree you want the boat, then make an offer with earnest money, do your survey and sea trial, then reject or accept the boat, renegotiate the price, etc. Then once you accept the boat your earnest money is then at risk and if you don't complete the purchase it looks like you forfeit the money. My question is ... why ? I mean I am sure there is probably a reason, but what is it ? Trying to see it from the seller's side I really don't see what damages they could suffer to create an expectation of keeping the earnest money. The seller didn't pay for anything, the buyer pays for the survey, hauling the boat, etc.
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Old 09-11-2008
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Your earnest money will get returned to you if you don't accept the boat. But if you accept the boat, then you have made a contractual obligation to purchase it. If you back out, the seller is damaged by having taken the boat off the market and possibly having lost another prospective purchaser.

But there are some folks feel the real purpose of earnest money is so that the broker can get his/her commission up front without worrying whether the seller will gyp them after the sale is completed.
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Old 09-11-2008
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Quote:
Originally Posted by JohnRPollard View Post
Your earnest money will get returned to you if you don't accept the boat. But if you accept the boat, then you have made a contractual obligation to purchase it. If you back out, the seller is damaged by having taken the boat off the market and possibly having lost another prospective purchaser.

But there are some folks feel the real purpose of earnest money is so that the broker can get his/her commission up front without worrying whether the seller will gyp them after the sale is completed.
Our experience was:
  1. Make a purchase offer, contingent on a satisfactory survey, accompanied by a personal check made payable to the broker, "coincidentally" in the amount of the broker's commission;
  2. After our offer was accepted and the survey was found to be acceptable, the balance was due upon title transfer by guaranteed check, payable to the owner.
So, I presume the up-front money was the broker's fee.
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Originally Posted by JohnRPollard View Post
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But there are some folks feel the real purpose of earnest money is so that the broker can get his/her commission up front without worrying whether the seller will gyp them after the sale is completed.
A erroneous idea. As the broker usually manages the closing of the sale, he/she collects the fee as a check deducted right out of the proceeds of the sale, the buyer never gets the fee money and the broker doesn't need to worry about being paid later.
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Old 09-11-2008
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The purpose of earnest money is to qualify the buyer. To confirm that you do have SOME finances, SOME chance of making the down payment, and that you are committed to buying the boat--not just kicking tires.

It ensures that lookie-loos and dreamers aren't just wasting the broker's and seller's time.
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Yes, what hellosailor said and additionally, after the survey, counters, sea trails etc.etc., are completed to the buyer's satisfaction and all contingencies have been removed, it's a forfeitable incentive to complete the transaction
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The thought the real reason is that a deposit provides consideration. Without consideration (the buyer giving up something), there's not an enforceable contract - contracts aren't allowed to be one-sided. So if you want to hold the seller to his promise to sell to you the boat, you have to have provided something to the seller in exchange for that promise, in this case, a deposit.
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Quote:
Originally Posted by hellosailor View Post
The purpose of earnest money is to qualify the buyer. To confirm that you do have SOME finances, SOME chance of making the down payment, and that you are committed to buying the boat--not just kicking tires.

It ensures that lookie-loos and dreamers aren't just wasting the broker's and seller's time.
Yes, I see the reason for the deposit, what I don't see is the reason for forfeiting it if the sale goes sour.

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Yes, what hellosailor said and additionally, after the survey, counters, sea trails etc.etc., are completed to the buyer's satisfaction and all contingencies have been removed, it's a forfeitable incentive to complete the transaction
I still don't get it.

If you are buying a house for example, the house is worth what it is worth, and your money is worth what it's worth, and you make the deal, and later go to closing. At no time is there a deposit that is forfeit if the deal goes sour and somebody backs out.

And even if there were, the buyer is the one who would be "out". The buyer paid for the survey, paid to haul the boat, etc, if the deal doesn't go through it is the buyer not the seller who stands to lose money. You said, "completed to the buyer's satisfaction and all contingencies have been removed" as if that is to the buyer's benefit. That's just making a deal, a negotiation between the buyer and seller, it isn't like the seller is doing the buyer some great service by coming to terms on the deal.
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Last edited by wind_magic; 09-11-2008 at 06:08 PM.
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Quote:
Originally Posted by LookingForCruiser View Post
The thought the real reason is that a deposit provides consideration. Without consideration (the buyer giving up something), there's not an enforceable contract - contracts aren't allowed to be one-sided. So if you want to hold the seller to his promise to sell to you the boat, you have to have provided something to the seller in exchange for that promise, in this case, a deposit.
So you are saying that the earnest money is actually a premium paid for a one month (or whatever the term) "option to buy" while the deal is negotiated and settled.

That makes more sense to me.
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Originally Posted by wind_magic View Post
Yes, I see the reason for the deposit, what I don't see is the reason for forfeiting it if the sale goes sour.




If you are buying a house for example, the house is worth what it is worth, and your money is worth what it's worth, and you make the deal, and later go to closing. At no time is there a deposit that is forfeit if the deal goes sour and somebody backs out.

That's not the case in the three states I've done real estate transactions, where ernest moneys were standard, up to 10%, payed into an escrow account.

The purpose is primarily as mentioned above, compensation for time off the market should the deal not go through.
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