An interesting thing is happening between buyers and sellers in this changing market.
As a buyer’s agent I’m noticing my clients seem more and more concerned about the home inspection hurdle. They don’t want to put a lot of earnest money at risk for fear the home inspection will turn up something they can’t live with, and the earnest money will be potentially lost if they back out.
As a seller’s agent I’m seeing offers with less and less earnest money, and the seller is so happy to get an offer that they barely consider the insignificance of the buyer’s loss if he chooses not to move forward at any time with the sale. This makes sellers very vulnerable.
Now that we are tipping toward a seller’s market in the Charleston tri-county area, my advice to buyers and sellers will be to increase the earnest money in the contract.
If a buyer is so concerned about the home inspection that she doesn’t want to risk a minimum of 1% of the purchase price as earnest money, that buyer is not committed to the house and needs to keep looking. Honestly, if you are going to live in this house – raise your family in this house – does it really matter if there’s a little bit of wood rot at the door jamb behind the garage? Any major issue you can’t deal with will need to be repaired by the seller, per the contract, and if not, you are free to walk. Per the contract.
Sellers need to be especially concerned about earnest money, because buyers are walking. An increasing number of them are demanding the seller fix a litany of insignificant things, and even when the seller agrees to fix everything, they are backing out “because of the inspection.”
This scenario has played out a handful of times in the last six months, and each time I represented the seller. We lost the buyer in each case except one – where the buyer put up $2500 in earnest money, and we refused to release it when he tried to back out, we were able to get him to closing.
My advice for sellers today is to require a minimum of 1% of the sales price in earnest money from any buyer who makes an offer on their property. When I first got my license this was a rule of thumb everyone followed – but somehow, when we got deep into the buyer’s market, we moved away from it. Experience over the last six months is telling me it’s time to bring it back.
I’m also recommending my sellers take one more step to ensure their buyer follows through with the contract: non-refundable earnest money after the inspection period. The banks are doing this with foreclosures. Sure, the bank is a tad less affected when an offer isn’t made to start with because of these strict rules, but it’s far better to wait for a committed buyer than to take your house off the market two or three times for buyers who are still shopping for a house.