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Explaining Earnest Money and the Time-Of-Market Fee (TOM).

There are so many best practices and strategies when it comes to tackling the purchase agreement and making an offer look as exceptional as possible without raising the bid. Today, I would like to introduce two tools to everyone; earnest money and the time-off-market fee, or more commonly known as the TOM Fee. Neither are mandatory, nor is there a standard amount required for either of these fees, as everything is negotiable and depends on what it is you want and what you're willing to put on the line in the transaction.

Earnest Money

Let's start with the earnest money. In most markets, it is expected that the buyer will offer up earnest money, usually around 1%-3% of the purchase price and it will be held in Escrow until closing. If everything goes as planned, the earnest money will get applied to the buyer's closing costs at the final closing table. The buyer may also get their earnest money refunded if they choose to terminate the agreement. There are plenty of contingencies to cover a range of reasons why a buyer would need to back out of the purchase agreement, whether it be contingent upon securing financing, getting satisfactory inspection results, or selling their own home first. As long as the buyer is hitting all his deadlines, his earnest money shouldn't be at the risk of litigation. If they are working with a knowledgable realtor, he or she will keep track of deadlines and be able to guide the buyer through to closing without any of the earnest money ever being at risk.

The buyer has many opportunities throughout their time under contract to terminate the purchase agreement based on their contingencies and have their earnest money refunded, so you might be wondering what the point of the earnest money is, if that money is never really on the line? The earnest money helps to prevent a buyer from making multiple offers on different homes and then walking away after an offer gets accepted. The money also, in some cases, will be negotiable to the seller if the buyer breaches the agreement or consents to make the money non-refundable after the agreed upon closing date and then is not able to close for whatever reason. The earnest money is, in essence, a show of good-faith and intention to perform.

If an earnest money dispute does arise, there are usually several forms of mediation that take place before any litigation is set in motion. Understanding the legalities behind the earnest money and its role in a Real Estate contract helps us comprehend why the TOM Fee was created. The TOM Fee, as explained next, arose out of the frustration of sellers, who may have taken their property off the market for sometimes several months and then feel uncompensated for their efforts and time lost if the deal fails to close. They will need to re-introduce their home back on the market, which costs money and may promote potential suspicion in future buyers who are concerned with why the house didn't sell.

Time Off Market Fee (TOM) Fee

The Time Off Market fee is exactly what it sounds like; a non-refundable compensation to the seller for taking the property off the market, while the buyer does some due diligence before fully committing to the purchase. The earnest money then is not due until a later date agreed upon in the transaction. The TOM Fee, unlike the earnest money, is paid directly to the seller and is not a credit at closing. The TOM Fee is not mandatory and in a slow market, would likely not be offered. The TOM Fee is just another tool in the buyers' belt when creating appealing offers and negotiating on price.

The amount of the TOM Fee depends on many factors including the current market, how long the buyers wishes to keep the home off the market and the expressed interest of other parties in the home. Usually the TOM Fee sits between $50-$500. Anything above $500 is not usually expected as it might interfere with a buyers' loan. Through the purchase agreement, the buyer and seller will agree upon how the TOM Fee gets paid, whether that be through their brokers or directly from buyer to seller via mail or electronic methods. New Mexico was the first state to adopt this TOM Fee and since, several other states including California have created something similar.

Final Thoughts

The use of earnest money and the TOM Fee can be very helpful when negotiating a contract, however, it is important that a buyer understands what the terms of the money are. If the buyer meets all the deadlines and closes the deal or terminates within their contingency rights, the earnest money will either be applied to all buyer costs at closing or refunded back to them. The TOM Fee, while a powerful negotiating tool that allows a buyer to examine the property without commitment, is money the buyer will not see again. When putting in an offer on a new home, a buyer should ask their Real Estate agent about how earnest money and the TOM Fee could make their bid more appealing without raising the price!

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