The time has come. After weeks of looking for the perfect home for your client, going to dozens of showings, and submitting countless offers – you have finally done it. Your Buyer is under contract. But as an experienced Realtor®, you know that ratification is only the beginning of the journey to settlement. One of the first steps your Buyer needs to take is to submit the Earnest Money Deposit (“EMD”) to ensure to the Seller that they are serious about this property. However, since agents are typically not parties to the sales contract, what is the Realtor®’s role in encouraging the Buyer to timely deposit the EMD? What about the Realtor® representing the Seller? The fact is, Realtors® may have more responsibility than you’d think!

Refresh my memory – what’s the point of the EMD?

The EMD serves an important purpose in real estate sales contracts. Not only does it demonstrate to the Seller that the Buyer has the necessary funds to proceed with the sale, but it helps minimize litigation over damages in the event of a dispute or breach of contract. Typically, if a party defaults on a contract, the other party can sue for any damages they’ve suffered. The EMD pre-determines these damages so that the parties do not have to expend attorney’s fees calculating out what the damages would be. The EMD also helps guarantee that the Buyer is serious about purchasing the property, so that the Seller feels confident about proceeding with this Buyer and taking their home off the market. Of course, if a Buyer validly voids a contract under one of their contingencies or statutory protections, the EMD is returned to them. If the contract proceeds to closing, the EMD is typically credited to the buyer on the Closing Disclosure. But if either party defaults on the contract and settlement does not occur, the EMD can be disbursed to the non-breaching party.

Where is the EMD deposited?

It depends! In Paragraph 3 of NVAR Form K1321 – Residential Sales Contract, the parties can agree to where the Buyer must deposit the EMD. The EMD can be held in escrow by either: (1) the settlement agent, (2) the Buyer’s Broker, or (3) anyone else who the parties designate as the Escrow Agent. Whoever ends up holding the EMD becomes the “Escrow Agent,” and is beholden to applicable regulations and laws regarding the safeguarding and disbursement of the EMD.

What is the 5-day rule for the EMD? Is it true that the Buyer has to submit the EMD within 5 days?

This is a common misconception. Parties can agree to any timeframe in which the Buyer must deposit the EMD to the Escrow Agent. The “five-day rule,” which comes from 18VAC135-20-180. Maintenance and management of escrow accounts. (virginia.gov), is a DPOR regulation that applies to situations where a broker is designated as the Escrow Agent. If the parties agree in the sales contract that the EMD shall be held by one of the brokers representing a party to the transaction, then the broker has five (5) business days after the deposit occurs to remit the EMD into an escrow account. If the Buyer submits the EMD to a broker, and that broker is not named as the Escrow Agent in the sales contract, then the broker is further obligated to deposit the EMD with the proper Escrow Agent within five business days. As with most contract provisions, this five-day period can be modified by written agreement of the parties.

If a Broker isn’t designated as the Escrow Agent, and if the Realtors® aren’t parties to the sales contract, what do I, as a Buyer’s Agent, have to do?

Let’s be clear about this: you should not sit back on your hands and leave the EMD up to the Buyer. Your client hired you for a reason – you are helping to facilitate settlement on their behalf. Under Virginia law, § 54.1-2132. Licensees engaged by buyers (virginia.gov), you are obligated to account for “all money and property received…in which Buyer has or may have an interest” in a timely manner. You will also “treat all prospective sellers honestly and not knowingly give them false information.” You are further obligated to provide, “reasonable assistance to the buyer to satisfy the buyer’s contract obligations and to facilitate settlement of the purchase contract.” These requirements are echoed in NVAR Form K1338, Exclusive Right to Represent Buyer Agreement. Additionally, 18VAC135-20-310. Improper delivery of instruments. (virginia.gov) prohibits agents from “failing to provide in a timely manner to all principals to the transaction written notice of any material changes to the transaction.” Finally, Article 2 of the NAR Code of Ethics requires that Realtors® avoid misrepresentation or concealment of pertinent facts relating to the transaction, which can include failing to properly inform the listing agent or Seller of issues with the EMD.

So what do all these laws mean for you? Essentially, you must stay on top of your Buyer to ensure they are depositing the EMD in accordance with the Sales Contract. Check in with them regularly and remind them of their obligation to timely deposit it, even explaining the risks of failing to do so. You should also follow-up with the Escrow Agent to verify if they have received and processed the EMD. You must keep the listing agent and Seller updated as well. If it appears your Buyer may be depositing the EMD late, inform the other side in writing of the delay as soon as possible. Keep a constant stream of communication going with the listing agent – remember: the Seller put a lot on the line to choose your Buyer. Not only may you be subject to a potential licensing violation from DPOR or a violation of the Code of Ethics, but the unreliable communication may also negatively impact your reputation as an agent. Ultimately, while you are not party to the contract, you are responsible to notify the listing agent and Seller of any changes to the EMD. 

What if I represent the Seller?

Just as with the Buyer’s agent, the listing agent is also obligated to facilitate settlement and notify the other side of any material changes to the transaction in writing. This means the listing agent should also be checking in on the status of the EMD with the Buyer’s agent and with the Escrow Agent. If the listing agent sees there will be a delay or learns that the EMD was not deposited, the listing agent must notify the Buyer’s agent immediately and explain the consequences to their Seller.

What are the consequences of failing to deposit the EMD?

Failing to deposit the EMD is not always fatal to the contract. Pursuant to Paragraph 3 of the Residential Sales Contract, if the Buyer has not delivered the EMD by the deadline, the Seller has the option to void. Seller’s right to void can continue until settlement. Buyer is able to prevent the Seller from voiding the contract by delivering the EMD prior to Seller’s delivery of a Notice to Void. This action would cure Buyer’s breach of the contract. Settlement can ultimately proceed with or without the EMD, even though Buyer is in breach, since the EMD is generally credited towards Buyer’s obligation to pay the sales price at settlement and the Seller would not be entitled to the EMD in the event of a successful settlement. However, if the EMD is not delivered and the Buyer fails to settle, the Seller will have to sue the Buyer for damages that may exceed the cost of the EMD. The benefit of the EMD is that it can limit the Buyer’s damages in the event of a default. Thus, it is in the best interests of the Buyer, and their agent, to ensure the EMD is timely deposited.

If you have any further questions on the EMD or your obligations, please feel free to submit an inquiry to the Legal Hotline & FAQs (nvar.com).