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The EMD - Is There "Skin In The Game"?

Realtors know that the “EMD” is the earnest money deposit required in a contract. It is the amount put down at the time a contract is signed. Contrary to usual dogma, there is no legal requirement for an EMD at all. However, the Florida Association of Realtors (FAR) contract form, the one normally used by brokers in this area, creates three reasons anyone interested in making sure a contract is closed should get all the EMD they can possibly get.

The first reason is that the form deletes damages as a remedy that a Seller can get if Buyer refuses to close. That means the Seller can either take the EMD or sue for specific performance. Specific performance is difficult, time consuming, and generally, unavailable. That leaves liquidated damages by claiming the EMD as the Seller’s only effective remedy.

The second deletion from the FAR form that makes enforcement of the contract unlikely is the deletion of legal fees for the prevailing party. If the EMD is two or three thousand dollars, and in the event of a claim the legal fee would exceed the deposit, most people won’t bother claiming the deposit. The deposit needs to be big enough to argue about, or small enough that it doesn’t matter. If it doesn’t matter, what good is it?

Finally, the FAR form, inexplicably in my view, requires arbitration in the event of a dispute. Arbitration is purely and simply the privatization of justice. It requires a person who holds himself out to be a private judge to appear before two lawyers, also privately retained, to attempt an unbiased legal decision from which there is generally no appeal. Because of the cost of the arbitrator and lawyers, the least expensive arbitration would cost several thousand dollars. If a deposit dispute is less than the cost of arbitration, most people will walk away from the problem.

The County Courts in Okaloosa and Walton County are fair and fast, and they can even be appealed. They are far and away our most efficient system of justice. They are free. Use them.

Unfortunately in my view, Realtors can’t change the form because some will say the Realtor is practicing law. They can’t even advise that their clients change the form, for the same reason. Others believe a Realtor will have no insurance protection if he or she changes the form. I frankly don’t know. But I know that a lawyer can, and should.

There are other reasons the amount of the earnest money deposit should be a concern. The above reasons arise from the FAR Contract.

But other reasons deserve attention too. I recently became aware of a neophyte investor who took lessons from late night television, had very little assets, but made a proposal to a bank to buy a several million dollar asset. The EMD in the offer was $5,000. A claim against that person for failure to close the contract would be a waste of time. It would also be a waste of time for the bank to take the property off the market waiting for that contract to close.

Another concern arises when a purchaser presents an offer in the name of a corporation, LLC, or trust. If the computers are running on both ends, I can create a new entity in about 15 minutes. That entity will be a person for legal purposes, able to make contracts. But that “person” will have no financial history, no assets, and no ability to respond to a judgment until those attributes are actually given to it. If an unknown or new entity is presented as a buyer, the careful broker will either advise the personal guarantee of someone with assets, or a very large EMD to assure performance of the contract. Malpractice claims await those who regard all entities as the same.

Finally, it will be much more difficult to enforce a contract where the buyer is from out of state and has very few financial ties to Florida, and loss of the EMD may be the only thing that compels that buyer to close.

The bottom line: The amount of the EMD is as much a part of a broker’s or lawyer’s artistry as any other part of his service.

Many standard forms create contracts without consequence. An experienced professional will protect his client from contract terms that don’t serve the client’s interest, and from artificial deposit amounts that don’t drive a contract to close.

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