The South Carolina Real Estate Commission recently ruled that earnest money may not be released unless the parties to the contract sign a release or a court order is issued. The Commission’s ruling, however, flies in the face of the statute and most sales contracts.

This ruling unfortunately ignores a significant portion of the statute. First, South Carolina Code §40-57-135(B)(4)(C) holds that “. . . the monies must be disbursed in accordance with the contract . . . ” Secondly, the statute states that, “If a dispute arises between buyer and seller concerning the entitlement to and disposition of an earnest money deposit, and the dispute is not resolved by reasonable interpretation of the contract by the parties to the contract, the deposit must be held in the trust account until the dispute is resolved by a written agreement . . .” The ruling totally ignores the first and last portions of the statute, which say that unless the dispute is “not resolved by reasonable interpretation of the contract.” Many disputes over earnest money are not truly disputes but rather are an attempt by one party to extort money from the other party. The plain language of the contract clearly dictates the proper disbursement.

For example, if the sales contract is contingent on an appraisal for $200,000 and the property appraises for $180,000, the Central Carolina REALTOR Association contract dictates earnest money be released to the buyer if the buyer terminates. The ruling, however, holds that the earnest money may not be released to the buyer unless the seller signs a release. This effect is contrary to the statute because there is no other reasonable interpretation of the contract other than that the money should be released to the buyer. An unreasonable seller should not be able to hold the earnest money and the buyer hostage. Otherwise, the provision now becomes contingent on appraisal and the seller’s agreement to release the money.

Answer to The real return on holding money is O minus the expected inflation rate. O minus the real interest rate. O the inflation. The Real Return On Holding Money Is Select One: 0 A, The Real Interest Rate.

Since this ruling, many real estate agencies like Century 21- Vanguard and The ART of Real Estate have decided to no longer hold earnest money. We expect others to follow suit. In North Carolina very few agencies hold earnest money. Blair Cato is now holding earnest money for these two companies. If you get a contract from one of these companies you will also receive an escrow agreement that essentially says Blair Cato is holding the earnest money and will disburse the funds pursuant to the terms of the contract. The addendum does not change the terms of the contract; rather, it simply states that as attorneys we are not subject to the rules of the real estate commission or the statute governing real estate agents. A copy of the agreement is attached below for your review. If you have any questions, please contact me.

Next week we will address some other options on handling earnest money to possibly negate some of your client’s risk.

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The Keynes’ Theory of Demand for Money!

Keynes treated money also as a store of value because it is an asset in which an individual can store his (her) wealth.

To Keynes an individual’s total wealth consisted of money and bonds.

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Keynes used the term ‘bonds’ to refer to all risky assets other than money.

So money holding was the only alternative to holding bonds. And the only determinant of an individual’s portfolio choice was the interest rate on bonds.

This would affect an individual’s decision to divide his portfolio into money and bonds. To Keynes, it costs money to hold money and the rate of interest is the opportunity cost of holding money. At high rates of interest an individual loses a large sum by holding money or by not holding bonds.

Capital gain/loss:

Another factor affecting an individual’s portfolio choice was expected change in the rates of interest which would give rise to capital gain or loss. According to Keynes when the interest rate was high relative to its normal level people would expect it to fall in near future. A fall in the rate of interest would imply a Capital gain on bonds. According to Keynes at a high rate of interest there would be low demand for money as a store of value (wealth).

There are two reasons for this:

(i) At high rate of interest the opportunity cost of money holding (in terms of forgone interest) is high.

(ii) At a high rate of interest future capital gain on bonds is likely due to a fall in the rate of interest in future. It is because there is an inverse relation between the rate of interest and the price of old bonds. Thus if the present rate of interest is high, people will expect it to fall in near future, in which case they will expect to make capital gain.

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Since the demand for money would fall at high rates of interest, and increase at low rates of interest, there is an inverse relation between the asset (speculative) demand for money and the rate of interest.

Keynes also considered transactions and precautionary demand for money whose primary determinant was income. Such demand would increase proportionately with increase in income.

So Keynes’ demand function for money can be expressed as

M_d = L(Y, i) … (3)

where Y is income and i is nominal interest rate and L stands for liquidity preference.

Policy Conclusions:

Thus, in Keynes’ view, the demand for money is a function of both income and interest rate, though in the classical theory, it was a function of income alone. This point is important in explaining the differences in policy conclusions between the classical and Keynesian models.

1. Determination of nominal income by the supply of money:

If the demand for money is exactly proportional to income, as in equations (1) and (2), then nominal income (PY) is completely determined by the supply of money. Since M= M_d= kPY, if k is assumed to remain fixed in equation (1) an increase in money supply (M) in equilibrium would result-in a proportional increase in PY. So we get

ΔM = kΔPY

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or, 1/K ΔM = Δ PY … (4)

Thus equation (4) makes it abundantly clear that PY can change only when M changes, k remaining fixed. This means that changes in fiscal policy or autonomous changes in investment demand have no role in determining the equilibrium value of income. This is indeed the classical case of vertical LM curve, in which if M is fixed the level of income is automatically fixed. And any shift of the IS curve will only affect the rate of interest.

2. Role of fiscal policy change in income determination:

In Keynes’ money demand function, income is not proportional to the supply of money. This means that income changes can occur due to changes in fiscal policy and autonomous shifts in investment demand. In this case the LM curve will be upward sloping and any shift of the IS curve will change the equilibrium value of income. Of course, slopes of the IS and LM curves will determine the relative importance of monetary factors and other determinants of income (that shift the IS curve).

The Monetarists’ View:

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