Selling agent Steve has written an offer for Bobby Buyer. The offer states the earnest money is in the possession of the holder. At the offer signing, the buyer remits the $1,000 earnest money in the form of two $500 money orders which he picked up from his favorite Western Union or MoneyGram location.
The offer doesn’t become a binding agreement and the buyer searches for another home. This is not a problem regarding the earnest money, the buyer plans to use it on the next offer.
Several months later after a diligent search, the buyer finally locates another property and makes an offer. This property is a short sale listing. The offer is structured to allow the earnest money to be paid by the buyer upon seller’s short sale approval.
Bobby Buyer exercises lots of patience and nine months later the short sale is not approved by the seller’s lender. Bobby decides to throw in the towel on this property. He terminates and places an offer on another property that recently came on the market. The seller accepts the offer. The contract is processed by the selling agent Steve using the original $1,000 earnest money, which was provided many months ago with the very first offer.
Several days into the transaction, Steve gets a letter from his broker stating the earnest money was returned “NSF.” But wait, the earnest money was paid with money orders!
Many money orders contain contractual language printed on the back of the money order which limits the amount of time the money order is good for the issued amount. This verbiage goes on to indicate a monthly service charge will be assessed against the issued value. When this happens, the money order loses value and these fees vary from $.25 to $1.00 per month.
The service fees are calculated retroactively from the purchase date of the money order. Thus, the money order bounced (the value of the money order was insufficient meet the amount of which it was presented).
Let’s examine this more closely. A $1 monthly service fee assessed to each money order has now reduced the value of each money order by $14 over a 14-month period. This means each $500 money order is good for only $486. The problems are only beginning. Not only is there an insufficient amount of earnest money, but the buyer could find himself in default on the transaction if he doesn’t rectify the issue quickly. Yikes! This all happened so innocently and no one ever considered the money order would bounce.
Time is money, and when it comes to money orders, too much time may begin to eat the money. In general, we must always act prudently when it comes to earnest money and money orders. Process all earnest money as quickly as possible and in compliance with the contract.
Keep an extra watchful eye on the age of the money orders to avoid unwanted problems.
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