How to write your initial deposit check, or good faith deposit check, all wrong

Good checks acceptedHome buyers might be surprised that there’s a right and wrong way to draft the check for the initial deposit or earnest money when a real estate contract is presented here in Silicon Valley.

Right way – Be Specific:

  • Find out the name of the title company and make the check payable to that particular title company
  • Put the property address in the memo line
  • Write a new check for every offer

Wrong Way – :

  • Leave a big, blank space and write only Title Company in the “to” line
  • Write a generic initial deposit number that has nothing to do with your offer (not 3% of the offer amount)
  • Leave the date blank so that your agent or someone else can fill in the date later (with different hand writing & ink)

Why does it matter?  The first way, the seller and listing agent know that you are interested enough to find out where escrow is opened and to write a check for this particular property.  The second way is as if you are throwing spaghetti at a wall to see if it will stick. (Yes, throwing cooked spaghetti at a wall IS a good way to know if it’s cooked, but it doesn’t work well for much else in life.)

Perhaps if your offer is the only one, the effort you put in with this small detail will seem moot.  But if you are up against multiple offers, shortcuts on your part, or your agent’s, will count against you.  Put it this way: if you don’t look serious when you’re trying to make a good impression (think of a courtship), how will you be in escrow (think marriage)? If it’s bumpy now, it doesn’t bode well for the future – and you might be eliminated from the running since you’ve failed to make a better first impression. So slow down and do it right!

 

 

 

Writing an Offer in a Multiples Situation? Financing Tips (Part 2)

ten-dollar-billMultiple offers are a joy to home sellers and a nightmare for home buyers.  There are many disclosures warning of the dangers of overbidding and giving away too many rights in the purchase agreement, and rightly so.  You certainly never want to give up that which will make you overly vulnerable (such as no contingencies for financing or property inspection).   At the same time, though, to actually be the winning bidder, your offer must be better than everyone else’s.  Financing terms can really “make or break” your offer.  Today we’ll discuss a couple of those financing terms: the initial deposit  & the increase of deposit (and related issues of liquidated damages and default).

What are financing terms?   They are all the details of how exactly you will pay for the home and get money into escrow.  For example:

  • good faith deposit (initial deposit)
  • increase of deposit (if needed)
  • loan type (conventional, FHA, VA, seller carry?)
  • loan costs (will you pay or are you asking the seller to help pay?)
  • loan terms: are they realistic?
  • is there a pre-approval letter or a pre-qualification letter?
  • what is the total down payment amount? (and % of purchase price)
  • will you provide the “proof of funds” to the seller?
  • will you submit a copy of the check with your offer?

The initial deposit or good faith deposit is the amount of money that you’re “putting down” with your offer.  If your contract to buy the home is accepted, that check will be cashed within a day or two, so make sure that you write one that will not bounce!  In the San Jose area, most real estate agents write the offer such that there are three business days to get that money into the title company (which handles escrow services in northern California most of the time), but make sure you know how many days it is because it can be variable.  It is written right in the contract, so read & understand it.

(Please note that except for the initial deposit, the rest of the contract will reference days, not business days, if your agent is using either the CAR or PRDS purchase agreement form, both of which are standard in Santa Clara County and San Jose generally.)

Smart real estate agents will usually look for 3% deposit when a home sells, preferably in the initial deposit, but possibly part in that first check and the balance in an “increase of deposit”, which normally would happen when all contingencies are removed.  If you are competing against other homebuyers and your deposit is less than 3%, your position is weakened relative to theirs.

Why does the 3% target matter so much?  The reason is that it’s connected to the liquidated damages clause.  The liquidated damages clause is something buyer and seller would need to agree to for it to be enforceable, so in our PRDS or CAR purchase agreement forms there’s a place for buyers and sellers to initial it if desired (and in my experience, everyone does initial for it).  The deposit (and possibly increase of deposit)  is the potential penalty if the buyer defaults on the purchase.  (I’ll speak of defaults below.)

(more…)