When the owner of a property finds a person interested in buying it, and even if they both agree to carry out the sale of the property, there is a risk that before closing the transaction, one of the parties decides not to proceed.

In order to avoid this problem, it is recommended to execute an earnest money agreement whereby both parties undertake to perform the sale through an amount paid by the purchaser as a guarantee of the future agreement.

What is the earnets money agreement?

Earnest money agreement is a private contract, i.e., does not require the assistance of a notary public.

Also, as every agreement, it should include the terms such as description of the buyer and the seller, but it must also include the following details:

Amount paid as token payment: although there is no specific amount set by law, token payment shall be proportional with the total sale price agreed by the parties, which amounts usually to between 5% and 15%.
The sale price agreed in its entirety.

The maximum period in which the sale between the two parties is to be executed -usually between 2 and 5 months at most.

What is the key problem of earnets money agreements?

When the earnest money agreement is duly executed and fulfilled by the parties, there is no problem at all.

However, if it is not fulfilled, the consequences of breach will depend on the type of earnest money deposit, determined by the will that both parties reflected when they executed the said agreement.

There are different types of earnest money deposits:

Penalty earnest money deposit: only intended to establish the consequences relating to the breach of the agreement, not compelling compliance with the same.

Confirmatory earnest money deposit: the buyer defrays a part of the total sale price, undertaking to complete payment upon execution of the sale agreement.

If unspecified, what kind of earnest money agreement do we have?

If unspecified, case law provides that the earnest money be deemed confirmatory, i.e. amounts paid to be deducted from the final sale price.

If you plan on buying or selling a property, or know someone who intends to do so feel free to contact us, we will help you through the whole process and you will be advised at all times during the sale/purchase of your home.

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