In some areas of the country, a potential buyer who is interested in a specific property will give the real estate agent a small sum of “earnest money” or a “binder” to show the buyer’s intention to proceed with a deal. This is common elsewhere, but not in New York City. For starters, agents do not maintain escrow accounts. More importantly, a handshake is not sufficient to bind the parties to a real estate deal in New York City. Not to bore you with details, but it’s called the statue of frauds and this law requires that real estate contracts be in writing and signed to be enforceable.

If you have made a verbal offer and been asked to give a “binder” or “earnest money,” tell the seller’s real estate agent that you want to proceed quickly and get your lawyer involved. Tell the seller’s agent you want to get whatever inspections you need and have the pre-contract inquiries done. There is really no reason to give a binder.

However, if you have already given a binder, be assured that it is generally not enforceable. You can get a refund. You will probably just get your original check returned. (Do not give cash.)

When is a Deal ‘Enforceable?’

When does the money truly “bind” you to a deal? The buyer is bound when he or she actually signs the contract and the seller signs the contract and the contract is returned to the buyer’s lawyer. Then, it’s a done deal.

In New York City “going to contract” involves the buyer submitting a check for 10 percent of the purchase price as a “contract deposit,” to be held by seller’s lawyer once the contract is fully signed.  (Sometimes it’s less than 10 percent.)

Can You Get a Refund of the Contract Deposit Once It’s a ‘Done Deal?’

There are few “loopholes,” but several scenarios exist when a buyer may get their contract deposit returned.

  • If a contract is subject to the buyer obtaining a mortgage and the bank’s appraisal comes in significantly under the purchase price, it is possible the bank will not loan the amount of mortgage specified on the contract. Hence, you can get your contract deposit refunded. (Note, however, if the buyer intended only a small loan, say 50 percent of the purchase price, and the bank would still loan the intended mortgage,  then the deal would go forward. No loophole.)
  • If the buyer’s loan is declined by the bank, the buyer will generally get their contract deposit returned. (Buyer beware: Of recent vintage is the insistence by sellers that a deal be “not contingent on financing,” meaning you may try to get a mortgage, but if you are denied a mortgage by the bank or lender, you cannot get out of the deal. Or, perhaps the appraisal is low and the lender won’t loan you the money. Neither of these scenarios will get you out of the deal if there is a clause “not contingent on financing.” You are on the hook to get the money from somewhere and close the deal. It’s very risky.)
  • If a co-op board turns the buyer down, the buyer gets their contract deposit returned.
  • If the co-op board issues a conditional approval (i.e., demanding that the buyer deposit a maintenance escrow equal to two years’ worth of maintenance), the buyer can get out of the deal and get their contract deposit refunded.
  • If the condo board does not issue the “waiver of first refusal,” the buyer gets their contract deposit returned.
  • If a co-op board has not issued its decision by a certain outside date, the  buyer can get their contract deposit refunded. (But, it tends to be a long wait…)

In conclusion, before you think about handing money over, speak with your lawyer first.

(Featured photo by Tricia J via Flickr Creative Commons)

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