If you are selling your property without a real estate agent, my Free Chicagoland FSBO Starter Kit includes practical information designed to help sellers understand the steps involved in a private home sale.
When you sell your home without a real estate agent, the buyer’s earnest money should usually be placed with an agreed escrow holder rather than simply given to the seller. In a Chicago-area FSBO transaction, the escrow holder might be a title company, an attorney, the buyer’s brokerage, or another party identified in the purchase contract.
This is one of those details that many FSBO sellers do not think about until they already have a buyer.
A buyer makes an offer.
The seller accepts it.
The contract calls for earnest money.
Then someone asks a very practical question:
Where exactly is the money supposed to go?
Why FSBO Transactions Are Different
In a traditional real estate transaction, a real estate brokerage may be designated to hold the earnest money.
But in a For Sale By Owner transaction, there may be no listing brokerage involved at all.
That means the buyer and seller need to decide who will act as the escrow holder.
The purchase contract should answer that question.
Depending on the transaction, the earnest money may be held by:
- A title company;
- An attorney’s escrow account;
- The buyer’s real estate brokerage, if the buyer has an agent; or
- Another escrow holder agreed upon by the parties.
The important thing is that the arrangement is clearly established in the purchase agreement.
Selling FSBO in the Chicago area? Before signing a purchase agreement, download the Free Chicagoland FSBO Seller Starter Kit for a practical overview of the private-sale process.
Should the FSBO Seller Hold the Earnest Money?
Generally, that is not the arrangement I would recommend.
Earnest money is supposed to remain in escrow while the transaction is pending.
If the seller simply deposits the buyer’s earnest money into a personal account, problems can arise if the transaction is later terminated and the buyer claims the money should be returned.
Using an independent escrow holder creates a cleaner arrangement.
The escrow holder has possession of the money, but neither the buyer nor the seller can simply treat it as their own while the transaction is pending.
What Does Earnest Money Actually Do?
Earnest money is a deposit made by the buyer after entering into the purchase contract.
It demonstrates that the buyer is serious about completing the transaction and provides some protection to the seller if the buyer later fails to perform.
The contract usually specifies:
- The amount of earnest money;
- When it must be deposited; and
- Who will hold it.
For an FSBO seller, all three of those provisions deserve attention.
What Happens to the Earnest Money at Closing?
If the transaction closes normally, the process is simple.
The earnest money is generally credited toward the buyer’s funds required to purchase the property.
For example, if the buyer has deposited $10,000 in earnest money, that $10,000 normally becomes part of the money the buyer is contributing toward the purchase at closing.
What If the FSBO Transaction Falls Apart?
This is where the escrow arrangement becomes particularly important.
Suppose a buyer terminates the contract.
The seller may believe the buyer breached the agreement and that the seller is entitled to the earnest money.
The buyer may believe a financing, inspection, attorney-review, or other contingency allowed the buyer to terminate and recover the deposit.
The escrow holder generally is not there to decide who has the better argument.
Instead, the funds may remain in escrow until the parties provide appropriate instructions or the dispute is otherwise resolved under the contract and applicable law.
That is why a seller should not assume:
“The buyer backed out, so I automatically get the earnest money.”
The answer depends on the contract and the circumstances surrounding the termination.
What Should an FSBO Seller Put in the Contract?
Before signing a purchase agreement, the seller should make sure the earnest-money provision answers several basic questions:
- How much earnest money is the buyer depositing?
- When does the buyer have to deposit it?
- Who will hold the money?
- Where will the money be held?
- When can the buyer recover it?
- What happens if the buyer defaults?
- How can the escrow holder release the funds if the parties disagree?
These are not glamorous questions.
Neither is replacing a furnace, but people suddenly become very interested in furnaces when one stops working in January.
Earnest money works much the same way. Nobody cares much about the escrow language until the transaction goes sideways.
The Bottom Line
In a Chicago-area FSBO transaction, the seller and buyer should designate an escrow holder in the purchase contract.
That may be a title company, an attorney’s escrow account, the buyer’s brokerage, or another agreed escrow agent.
The seller generally should not treat the buyer’s earnest money as personal funds while the transaction is pending.
And if the sale falls apart, the party holding the money may not be able to release it simply because one side demands it.
For FSBO sellers, deciding who will hold the earnest money is one of the many transaction details that should be worked out before the contract is signed.
If you are selling your property without a real estate agent, my Free Chicagoland FSBO Starter Kit includes practical information designed to help sellers understand the steps involved in a private home sale.
