Earnest Money?

When I finished law school in 1993, Julie and I moved to Little Rock.  We didn’t know a thing about the city.  A friend from school encouraged us to look at the Hillcrest neighborhood, which turned out to be great advice.

But starting out wasn’t easy.

Hillcrest is special.  Depending on your political leaning, it is either lovingly or disparagingly known as “The Peoples’ Republic of Hillcrest.”  Because of its proximity to downtown and the medical corridor, the real estate market here can move fast, and the market was especially hot during the ‘90s.

We were just starting out and didn’t have much money, but got lucky and secured a rental home with a 1-year lease.  We moved in while I studied for the bar exam and quickly grew to love the neighborhood.  Things were going well until October, when our landlord informed us he was getting a divorce and had sold our home.  We would need to be out by the end of the year.

Panic!  What were we going to do?   Finding a place in Hillcrest would take time, and we didn’t have time.  I started driving around the neighborhood looking for homes for sale or rent.  Looking back, I had no business thinking this would solve our problem.  We didn’t have time to make a deal or money to do it.

But, as a wise man once noted “sometimes nothing is a real cool hand!”[1]

I found a small bungalow at 320 North Palm, a few blocks over that was “For Sale By Owner,” and found out there was going to be an open house that weekend.

The house was perfect for us!  Only 1300 square feet, but 3 bedrooms, 1 ½ baths and well maintained.  It had great street appeal and an ample back yard.

The problem was, the house was perfect for every couple attending the open house, which became a spectacle.  It was like a game of musical chairs, as couples would hover around the owner, waiting until other couples were out of earshot to maneuver to land this gem.

It was clear that this house was going to move fast.

Julie and I realized that house would be gone by the time we figured out how much we could afford, or whether we could even qualify for a loan.  We would just need to go for it and hope everything worked out.

I called the owner and told her we would like to meet with her to make an offer.  She asked which couple we were.  Fortunately for me, Julie makes a great first impression, and had made a connection with the owner.  “Oh yes, I liked you! Come by tomorrow night.”

So far, so good.

That meeting turned out to be a comedy of errors and luck.  The 3 of us immediately liked each other, and enjoyed talking rather than dealing with business at hand.  Finally, the owner broke the festivities and asked if we would like to make an offer.  The home was listed for $75,000, we offered $70,000 and immediately agreed to pay $72,500!

Being a newly minted lawyer, I knew there was more to it than this, but honestly didn’t have a clue.  The owner told us she was working with the local title company and pulled out a form “Offer and Acceptance” which the 3 of us tried to decipher for the next hour or so.  During that time, no less than 3 other couples called asking to make an offer, only to be informed “I’m signing a contract right now.”  That was perhaps not entirely correct, but we didn’t know any better.

I asked what we needed to do next.  The owner said the title company told her that we needed to send them the completed form with some earnest money.

My heart stopped.  I had just passed the bar, but had never heard the phrase “earnest money” and had no idea what it meant.  I bluffed, shaking my head knowingly and holding back my increasing anxiety.  “How much,” I asked.

“I don’t know – what about $50.”

I wasn’t sure we had $50 that night, but payday was coming up and I thought we could probably float the check until then.

The next day Julie drove the “contract” and check to the title company.

The day after that, one of the other couples called the owner and offered: “My Daddy will pay full price, cash, for your house.  We can close as soon as you can be ready.”

The owner wasn’t sure how to handle this one.  She liked us and all, but that was a tempting offer.  She asked some friends for advice.  When she explained the situation, fortunately for us none of them understood real estate any better than us.  One of them explained: “Oh no – that other couple has put down earnest money – you have to honor your agreement with them.”  The owner agreed, and called back rejecting the full price cash offer.

Later that day the title company called Julie to ask about the $50 check.  “That’s earnest money,” Julie explained.  “Oh no!” the lady responded.  “That’s not earnest money – you need to put up at least $500 or we will instruct the owner to move on.”

$500!  It might as well have been $5,000! We didn’t have anywhere near that.  But fortunately, we had bought a little time and were able to line up some help from my parents.  The owner and title company agreed to let us get the money to them by the end of the week, and we did.

So – a $50 check held the house from a full price cash offer!

We were able to close and moved in over the New Year holiday (note: when you offer to pay your friends in beer to help you move – don’t pay until after the job is done!), and made that house a home!  It was part of the family for 10 years, where we brought home all 3 daughters.  We loved it so much we lived there long after it was too small, and only left after we found the next perfect Hillcrest home.

[1] : Luke Jackson, Cool Hand Luke