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Buyer question - Earnest money

12K views 37 replies 13 participants last post by  wind_magic 
#1 ·
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.
 
#2 ·
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. ;)
 
#3 ·
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.
 
#5 ·
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.
 
#8 · (Edited)
Yes, I see the reason for the deposit, what I don't see is the reason for forfeiting it if the sale goes sour.

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.
 
#7 ·
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.
 
#11 ·
The decision to return the deposit is based on the seller backing out for no reason other than change of mind. If you make an offer with intent to purchase with contingency's and all said contingency's are met and you back out, the deposit is forfeited period. This applies to boat, cars, RV's and houses. There is nothing you can do unless your state has laws to the contrary. I have seen few states that do.
 
#12 · (Edited)
Yes but isn't that a double standard ? It's a binding contract, both the buyer and seller are bound by it if the buyer accepts the vessel and agrees to the purchase. Both the buyer and the seller are obligated to make the transaction at that point - but the buyer has to put forth an at risk 10% (or whatever) deposit and the seller has to put down ... nothing ? As I said, the buyer is the one who is most at risk at that point - the buyer has paid for a survey, to haul the boat, etc, and has actual money invested in the deal, the seller has nothing invested in the deal. Yes, the seller loses a month of having his asset on the market, but the buyer also has an asset .. money .. tied up that he can't use for other purposes while the deal is being settled. If the seller backs out of the deal isn't the buyer the one out money ? Isn't it the buyer who is left holding the bag ? It almost seems like it should be the seller who puts up money to make sure the deal goes through to help cover the expense of the survey and hauling the boat in the event that the seller changes his mind and decides not to sell at the last minute. By paying for a survey, hauling the boat, etc, the buyer has proven his commitment to making the deal go through.
 
#14 ·
When buying a used car, the buyer makes a deposit, then comes back to close the deal, and pays the balance. I have heard of instances where the seller gets a better offer after recieving the first deposit, and simply returns the first deposit to the first buyer and sometimes only informing the first buyer that he sold the car to another guy when the first buyer comes to pick up the car. I consider this unethical, but the buyer has no recourse here.

I agree with Wind Magic, the risk is all on the buyers side. To make it fair, both the buyer and the seller should make a deposit, to be held in trust by the broker.

Eric
 
#16 ·
When buying a used car, the buyer makes a deposit, then comes back to close the deal, and pays the balance. I have heard of instances where the seller gets a better offer after recieving the first deposit, and simply returns the first deposit to the first buyer and sometimes only informing the first buyer that he sold the car to another guy when the first buyer comes to pick up the car. I consider this unethical, but the buyer has no recourse here.

I agree with Wind Magic, the risk is all on the buyers side. To make it fair, both the buyer and the seller should make a deposit, to be held in trust by the broker.

Eric
If there is a contract to purchase with a deposit and the used car dealer sells the car you have a lawsuit.
 
#18 ·
In both real estate and boats... the SELLER is at risk by losing out on another potential sale. Yes, the buyer is most at risk but if the buyer backs out, the seller could have lost another buyer he had to turn down. Or maybe the house/boat was not available for inspection by another potential buyer b/c the first buyer had it tied up w/ survey/sea trial/etc.

As someone who has gotten jerked around by people that were kicking tires on the trailer, and foundations on the house... I say put up or shut up and take a walk!
 
#20 ·
In both real estate and boats... the SELLER is at risk by losing out on another potential sale. Yes, the buyer is most at risk but if the buyer backs out, the seller could have lost another buyer he had to turn down. Or maybe the house/boat was not available for inspection by another potential buyer b/c the first buyer had it tied up w/ survey/sea trial/etc.

As someone who has gotten jerked around by people that were kicking tires on the trailer, and foundations on the house... I say put up or shut up and take a walk!
Everything you just said goes both ways. There was a post on another forum recently where the potential buyer was lured to a boat from a great distance only to have the boat sold out from under him when he got there, losing lots of money in the process. Sellers jerk people around too.

The buyer and seller are equals in the deal. Yes, the seller has an asset, a house, boat, or whatever, and the buyer has an asset, MONEY. They both bring equal amounts of value to the table, if they didn't the one on the losing side wouldn't go through with the deal. They are both parties to the contract, and they are both committed at a certain point to go through with the deal. They are both losing money by having their "asset" off the market. Yes, the seller might lose a sale because another buyer might come by, and the buyer might lose a potential buy because another seller came by and sold their asset while the buyer was tied up in this contract with you. It goes BOTH WAYS. More over, the seller has NOTHING invested in the deal, all he has to do is sign the paper and instantly know that he is going to make money one way or the other. The buyer on the other hand has not only the money spent on survey, hauling the boat, etc, on the line, but now also "earnest money" that can be lost if the deal doesn't go through. What does the seller risk ?
 
#19 · (Edited)
If there is a contract to purchase with a deposit and the used car dealer sells the car you have a lawsuit.
Maybe, but it still happens (more so with private deals than with dealers). In the same way if the buyer has made a contract with the seller what is the deposit for? The seller could just sue the buyer if the buyer backs out, which is what you suggest if it's the other way around.

Eric
 
#22 ·
Let me try and put it a little simpler. When you sign a contract to purchase there is an couple of paragraphs on the front in bold writing. There are a couple of paragraphs on the back in not so bold writing. All of these are referred to as "legalese" that states th buyer and sellers writes. When you sign you are obligated to the contract.

I can understand your thought that it goes both way as it does with everything. There is always to sides to each argument. That is why there is standards of practice and laws for protection.

Because I am selling something and YOU are making an offer to purchase I the SELLER am considered the one at risk. It is YOUR responsibility to conduct a reasonable search for information to insure you are buying what is being presented and that it is a the good condition for the value being asked. Then that decision is yours to make.

Your recourse comes when I fail to live up to my agreement or in the event I misrepresent my product.

In short if you are uncertain of the product as presented or you sincerity in following through with the purchase then you should not offer to purchase by way of a contract.

You came to me I did not come to you. On the other hand if I had come to you the laws change in your favor.
 
#25 · (Edited)
Let me try and put it a little simpler. When you sign a contract to purchase there is an couple of paragraphs on the front in bold writing. There are a couple of paragraphs on the back in not so bold writing. All of these are referred to as "legalese" that states th buyer and sellers writes. When you sign you are obligated to the contract.

I can understand your thought that it goes both way as it does with everything. There is always to sides to each argument. That is why there is standards of practice and laws for protection.

Because I am selling something and YOU are making an offer to purchase I the SELLER am considered the one at risk. It is YOUR responsibility to conduct a reasonable search for information to insure you are buying what is being presented and that it is a the good condition for the value being asked. Then that decision is yours to make.

Your recourse comes when I fail to live up to my agreement or in the event I misrepresent my product.

In short if you are uncertain of the product as presented or you sincerity in following through with the purchase then you should not offer to purchase by way of a contract.
I really do understand what you are saying, and I think you understand where I am coming from too.

You came to me I did not come to you. On the other hand if I had come to you the laws change in your favor.
That's only true in part. The reason you didn't come to the person with the money is because if that person posted a message on the multiple listings saying "I have 'X' dollars for sale", then they would get a lot of boats coming their way to collect it, because all the boat owners are interested in the asset that the money has on offer. They wouldn't need to survey the money, or take it for a sea trial, and there is little chance that they wouldn't like it's lines, or the way it folds up and fits in their wallet, but it is an asset that they are interested in and they DID come to the market looking for it, because that's "where the money is". I'm confident if any buyer just posted a message saying they had "X" amount of money and wanted "a boat" that there would be plenty of boats being offered to the "seller" of the money.

So it's not that the buyer comes to the seller because the seller is special, or that the buyer is in some way indebted to the seller, it's simply because the seller's asset is much more illiquid than what the buyer has on offer. The buyer's asset is better in that regard, because every seller wants it, the only question is how much of it is on offer.
 
#23 ·
Wind,

I think that DavidPm probably got this in the simplist words explaining it. You can argue what YOU think "logically" all day, but the game is usually not played your way. As David said, you can make your contract without a deposit and the seller may or may not go along with it. However, in my opinion that is when you the buyer become most at risk. You are putting money into all the expenses you have already discribed, and at any moment the boat that you now know is "perfect" can be bought out from under you!

The buyer and the seller both are risking assets in any agreement. They are just different assets.
 
#24 · (Edited)
You are putting money into all the expenses you have already discribed, and at any moment the boat that you now know is "perfect" can be bought out from under you!
I'm sure there are exceptions but I suspect that if you want out of a contract and want your deposit back many sellers and brokers will give it back in practice.

The negative karma is very high keeping a deposit. You are, however, at the mercy of the seller and have to be a convincing actor.
I will ask a broker I know who has sold thousands of boat how many deposits he has kept.
 
#36 ·
Wind,
My response on your possibly losing the sale after investing money was a continuation of David's example of negotiating a sale without earnest money.
As a seller I would not take the boat off the market because you think you want to buy it, but not enough to put some money on the table. I would agree to sell you the boat at XXX price, and let you do the survey, etc.. , but as in David's example I and my broker would use your interest to get others that may be interested to the table. Hopefully, they would come with money!

Face it, if the contract is written to protect both the seller and the buyer earnest money is not a big loss for a few days or weeks. If you are worried about the interest on 10% of $10,000 or $500,000 with todays short term interest rates you probably don't want to know just how expensive that boat really is.
 
#37 · (Edited)
Face it, if the contract is written to protect both the seller and the buyer earnest money is not a big loss for a few days or weeks. If you are worried about the interest on 10% of $10,000 or $500,000 with todays short term interest rates you probably don't want to know just how expensive that boat really is.
That's absolutely a good point.

Negotiating is an art and too heavy a hand will not get the result you want.
While todays economy favors the buyer if I was selling a boat and the buyer was a little too rough which depending on the circumstances might include not being willing to part with with 10% I would be tempted to do something that would send them packing like saying the mast was not included.
There are some people that due to ignorance or narcissism you do not want to sell anything to. If you sell them something for a dollar they will extract $100 dollars of aggravation out of you.
There isn't a boat for sale that isn't a money pit and I don't want to sell my boat to someone who for the next 5 years will be threating lawsuits and knocking on my door being a pest. As a seller I want a clean sale. I don't want to adopt a child.

I'm not saying that I would refuse to sell to the OP, I assume it was a legitimate question. But that attitude if expressed in just the wrong way and combined with some sharp negotiation and a "what about me attitude" and smart sellers and brokers will say "Sorry boats already sold"

I don't have a problem with the goal. To get a boat with the least commitment. What I do have a problem with is someone not even hypothetically being able to empathize with the seller. I can almost guarantee you that the person who complains the loudest as the buyer will complain even louder only with opposite logic when they are the seller.

I did buy a house for about 30,000 under market because the seller thought my son, about eight, at the time was cute and she wanted her family house to go to a family. So there are ways to get your way but a gentle hand works best.

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Tit for tat - Wikipedia, the free encyclopedia
 
#38 · (Edited)
Wow! I didn't realize the thread would bring out such deep feelings!

When it gets to this point it's probably best to stop having a discussion before tensions get too high. Thanks to everyone, and I do mean everyone, for all the great discussion. It was interesting to me and I learned a lot about contracts and what earnest money is for, as well as learning a lot about different people's views from the various perspectives in the process - especially the broker's perspective since the brokers are the ones with the big picture view. You people are the best. :)
 
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