THE EARNEST MONEY TRAP - LESSONS

Continuing yesterday’s story, here are the practical lessons:

1. Earnest Money: Size Matters

There’s no fixed legal rule on how much earnest money should be. In institutional deals, 10% of the purchase price is common. But in private transactions between individuals, the absolute amount may matter more than the percentage.

The larger the earnest money, the larger the risk if something goes wrong. Its purpose is to show commitment — not to create financial damage.

Sometimes, a smaller but still meaningful amount is more prudent.

(For context: in the story, the broker eventually returned the earnest money. Long story — but it reinforces the point.)

2. Can Foreclosure Be Flagged Early?

Sadly, not easily.

Banks do not annotate foreclosure proceedings on the title while they are ongoing. Annotation typically appears only after the property has been sold at auction and the necessary documents have been registered. A clean title does not automatically mean the loan is current.

The safer step? Request a Statement of Account (SOA) from the bank to verify the status of the mortgage. This requires seller cooperation — and if they resist, that’s already a red flag.

3. “Papel Lang Yan.” - a Filipino-Chinese proverb

I used to believe contracts would fully protect parties from bad outcomes.

They do — eventually.

But “eventually” can mean years of litigation, stress, and legal expenses. As a reader commented, even STRONG cases can drag on for over a decade.

The better strategy is to structure the deal so that if something fails, the downside is manageable — which brings us back to Lesson #1.

4. Can We Prevent the Seller from Spending the Earnest Money?

In many countries, escrow solves this. In the Philippines, true third-party escrow for ordinary residential sales is limited.

Some suggest opening a joint bank account requiring both signatures. That reduces unilateral risk — but also freezes funds if a dispute arises.

There’s no perfect solution.

So manage what you can:

Verify loan status directly.

Structure protective clauses.

Keep earnest money reasonable.

In Philippine real estate, prevention is always cheaper than enforcement.