Here are some questions that are commonly asked when the topic of earnest money arises:

Q: Why is earnest money required when making an offer to buy a house?

A: Partly, it is local custom in the real estate community. Partly, it is the appropriate desire on the part of the seller to see that the buyer has some substantial financial resources available. And partly, it represents the hope of the parties that the sales agreement will culminate in a successful sale.

Technically, earnest money is not required in order for the sales agreement to be valid under Georgia law. However, if you are serious about buying a home, you can expect to pay a small portion of the purchase price along with the offer. That will be your earnest money.

Q: When a buyer submits an offer to purchase, when does the earnest money come into play?

A: Typically, a buyer who expresses strong interest in a home is encouraged to sign an offer to purchase. That offer includes a provision for a certain dollar amount of earnest money, along with instructions as to who will hold the earnest money and when the check for the earnest money is to be deposited.

It is not unusual at this point for there to be some bargaining between the buyer and seller, and in most cases, the earnest money check is not deposited until after the parties have arrived at a meeting of the minds and have signed a binding agreement.

Q: When a buyer submits earnest money with an offer, who should hold that earnest money?

A: It is important that the holder of the earnest money be someone who meets two criteria. First, they need to be trustworthy, because a failure to maintain the funds with adequate safety could be disastrous to the agreement. Second, they need to have the ability to understand and interpret the agreement between the parties, because disbursal of earnest money usually hinges on whether or not certain contingencies have been met.

In Georgia, all real estate brokers are required to maintain "escrow-trust" accounts at Georgia based financial institutions, and are subject to audit by the Georgia Real Estate Commission. Likewise, all real estate attorneys are able to maintain earnest money deposits. In my opinion, it is unwise to allow a seller to personally hold the earnest money.

Q: How much earnest money is appropriate to send with an offer to purchase?

A: Some agents suggest that buyers submit one percent of the purchase price with an offer. Others suggest that a thousand dollars is adequate. Only you can decide how much earnest money you wish to submit with your offer.

Q: Are there any situations in which a larger or smaller earnest money might make sense?

A: I once offered to purchase a house for all cash within seven days of the date on the contract. Although the offer was for significantly less than the seller was asking, I sent along an earnest money check for ten thousand dollars. My goal was to demonstrate to the seller that I was quite serious about the offer and that I had the financial ability to close the deal.

Q: Why are earnest money disputes so common?

A: Because situations sometimes arise in which the buyer is disappointed with his purchase decision, and wants to change his mind. This is often due to additional information disclosed during an inspection, or it may simply be a change of heart. In any case, the buyer's desire to purchase changes, and he seeks a refund of his earnest money.

In contrast, the seller wants to deal only with a sincere and committed buyer, and hopes that the threat of losing the earnest money will discourage the buyer from a change of heart.

Unfortunately, as long as both buyer and seller are humans, there will sometimes be disagreement. And because the money at stake is the earnest money, there will continue to be squabbles.

Q: How would a typical earnest money dispute occur?

A: Mr. Buyer offers to buy Mr. Seller's house and the agent uses the standard contract form from the Georgia Association of Realtors (GAR) to draw up the offer. Mr. Buyer requests an inspection of the property, and selects the contingency labeled "Property Sold with Right to Request Repairs", which I do not recommend.

During the inspection, Mr. Buyer's inspector finds evidence that the foundation may have shifted at some time in the past, but can not determine with any certainty whether or not an actual problem exists today.

Mr. Seller responds that honestly he has no knowledge of any foundation issues, and a subsequent inspection by another inspector reveals that the problem may not be anything to worry about. No one is willing to guarantee anything.

Mr. Buyer gets nervous, and decides that he is uncomfortable purchasing the Sellers house under any circumstance, and attempts to withdraw. Mr. Seller demands that he get to retain the Buyer's earnest money due to Buyer's failure to purchase.

As you can see, both sides have a point.

Q: In that case, what would happen?

A: If Mr. Buyer were wiling to lose his earnest money, he could probably walk away from the transaction. If not, he could threaten to sue for the return of his earnest money. If he did that, Mr. Seller might offer to settle the dispute by splitting the earnest money between the parties.

Q: How can inspectors come to differing conclusions?

A: Home inspectors are not licensed in Georgia, and are paid to give you their opinion based on what they can see. Some bring construction experience to their job, while others may actually be trained as engineers. Others may have little or no experience in the construction trade.

Regardless of their background, no home inspector can predict exactly when a structural element or a mechanical system might fail in the future, even though that is exactly what prospective home buyers want them to do.

Q: How could this dispute have been avoided?

A: If Mr. Buyer had selected "Inspection with Right to Terminate" in the GAR contract form, he would have been able to complete all his inspections and then decide if he still wanted to purchase the house. He would have no obligation to share the inspection with Mr. Seller, nor allow the seller an opportunity to attempt a repair of the problem.

Q: Aren't termites the biggest cause of earnest money disputes?

A: Not in my experience. In most cases, sellers are encouraged to have a termite inspection before they ever list with an agent. This practice avoids surprises at the closing table, and allows a seller plenty of time to make any repairs that might be needed.

Q: Does Georgia law require the termite inspection as a condition of sale?

A: No, there is no legal requirement that a property be inspected for termites. However, all conventional lenders require a clear termite letter as a condition of loan approval. Since most borrowers need a loan in order to make their purchase, most contracts are contingent upon the termite inspection.

Q: Is failure to obtain loan approval a serious problem?

A: Most smart home buyers begin their journey by getting informally pre-qualified for the loan amount they need. Assuming they have selected a reputable lender, it is unlikely that a serious problem will develop between the pre-qualification and the actual loan application.