Earnest money contract: everything you need to know

In Spain it is very common to buy and sell properties. In order to acquire a place or a house in which to start a business or create a family, several years of savings are usually needed. However, when talking about such important expenses of money there are quite a few who bet on reading the small print. So much so that doubts begin to arise in relation to a multitude of concepts related to this type of events. Among them is the earnest money contract.

To acquire a property supposes in the great majority of the cases the biggest investment of the life. For that reason, it is necessary to reach agreements with all the possible information in hand. Sometimes it is not simple, but sometimes it is enough to read a small explanation to discover if what is being done is beneficial or not.

What is an earnest money contract?

The earnest money contract is a document that allows you to reserve a property before formalizing your purchase contract. It is essential in real estate transactions to certify the payment of an amount by the buyer to the seller as a guarantee of compliance with the purchase contract.

By signing the earnest money contract the following is achieved:

• The buyer is assured to have a right on the acquisition of a good in exchange for an economic amount that has been previously agreed with respect to the total price.
• The seller, by means of the earnest money contract, undertakes to deliver the property to the buyer under those conditions that have been agreed. 

On the other hand, it is a document that is recommended to use, since it transcribes what, in future, will be the content of the public deed of sale. In this way, before this moment arrives, the conditions in which a property is sold and the penalties that will take place in case they are not fulfilled are already defined. 

What information should the earnest money contract for a property contain?

When we talk about an earnest money contract, we refer to a pre-contract in which all the conditions on which the subsequent sale depends are reflected. That is why it is important that this document does not lack the following information:

• Personal data of the buyer and the seller.
• Identification of the property and its description.
• Final price of the property and the form in which it is going to be paid.
• Amount of money that must be advanced to sign the earnest money contract. This will be deducted from the final price.
• The maximum time that can pass between the signing of the earnest money contract and the sale.
• The commitment that both the seller and the buyer have to sign, by means of a public deed, the contract. 
• Distribution of the expenses that can arise when the purchase-sale is carried out.
• The signature of the seller and the buyer.

In case the seller or the buyer is a married couple in community of property regime, the contract can be signed only by one of them. However, if it is a marriage in regime of separation of property or a couple that has not contracted marriage, then both must sign.

Types of earnest money contracts

There are different models of earnest money contracts and each one will be chosen depending on the purpose of the contract. This is important to keep in mind because each type has different legal consequences.

Confirmatory earnest money contract

The purpose of the confirmatory earnest money, as its name indicates, is to confirm that there is a commitment between both parties to the sale. They represent an advance payment of the total price.

In the event that this contract is breached, it cannot be rescinded unilaterally, but the general rules that exist with respect to the breach of obligations will be applied. Thus, the aggrieved person may choose between demanding performance or termination of the obligation.

Penal earnest money contract

Another form of guaranteeing the performance of the contract is the penalty deposit. In the event that the buyer fails to fulfill his part, the buyer can lose the total of the earnest money and, in the event that it is the seller who fails to fulfill his part, he must return it together with an amount that has been agreed at the time of signing the contract. 

Penitential earnest money contract

The penitential deposit gives the parties the opportunity to unilaterally terminate the contract by means of a doubled restitution for the seller or a loss for the buyer. In this section, it is necessary to specify that the penitential earnest money, also known as withdrawal, will only be applicable when its consequences are manifested in a specific way.

Is it mandatory to make an earnest money contract?

The creation of an earnest money contract when buying a house is not mandatory, but experts recommend it to prevent possible inconveniences. Similarly, if you are wondering if the earnest money contract is signed before a notary, you should know that it is not legally obligatory. However, it is advisable because it provides greater security and guarantees to the transaction.

Who makes the earnest money contract for a property?

In the case of hiring the services of a real estate agency for the sale of a second-hand property, the drafting of the earnest money contract is generally in charge of the real estate agency and the price is often included in the commission charged. In addition, it is possible to hire specialized professionals to draw up the contract, with costs that vary depending on the professional and the location of the property.

How to draw up an earnest money contract between private individuals?

The drafting of an earnest money contract can be carried out between two private individuals. The seller, in a transaction between private individuals, usually drafts it using a model, but the buyer can also take on this task.

How much does an earnest money contract cost?

Establishing a specific price is difficult, as it varies according to the unique complexity of each sale and purchase transaction. This type of contract is usually handled by a real estate lawyer who will be in charge of determining the fee, based on the value of the property and the complexity of the transaction. This variability makes it impossible to set a standard unit price for earnest money contracts.

Who pays the earnest money contract?

The buyer assumes the payment of the amount indicated in the earnest money contract, this payment being considered as a proof of his interest in the property. The contract usually establishes a percentage to be paid, typically between 5% and 15% of the price of the house, being 10% the most usual figure. It is important to emphasize that the amount paid as a deposit, through the earnest money contract, is discounted from the final price when formalizing the purchase of the property.

When is the earnest money contract signed?

The signing of this type of contract takes place when a potential buyer expresses interest in a property and wishes to secure it before others. The intention is to face these procedures with the certainty that the property he/she wishes to purchase will not be available to other buyers during these procedures.

What checks should you make before signing an earnest money contract?

The signing of an earnest money contract, although not a mandatory requirement, is crucial to secure the reservation of a property. This document must include essential data for its validity, such as detailed information on the parties involved and the property, the conditions of the transaction, the maximum term for the sale, the consequences of non-compliance, the type of contract and the distribution of expenses.

The absence of any of these elements could call into question the legal validity of the earnest money contract. This means that it is essential to verify the presence of all these details to ensure the legality of the document.

Can an earnest money contract be modified?

The answer is yes: the parties are free to modify the earnest money contract. However, they will have to reach an agreement beforehand and add an annex to the contract with the agreed modifications.

What happens if the earnest money contract expires?

The earnest money has a fixed term and failure to comply with it is considered a breach of contract. The repercussions may involve the loss of the amount or having to refund the duplicate amount.

In conclusion, the purpose of the earnest money contract in the purchase of a property is to secure it against other interested buyers. However, it is very important that you review the contract in depth before signing to verify that everything is indicated as agreed.