Earnest money, or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home. In most cases, earnest money acts as a deposit on the property you’re looking to buy. You deliver the amount when signing the purchase agreement or the sales contract. If the buyer decides to cancel the sale without a valid reason or doesn’t stick to an agreed timeline of the purchase contract, the seller gets to keep the money. Here are a few suggestions the home seller needs to know about earnest money and how they can keep the funds if the sale doesn’t work out.
Understanding Earnest Money
When a buyer decides to purchase a home from a seller, both parties enter into a contract. The contract doesn’t obligate the buyer to purchase the home, because reports from the home appraisal and inspection may later reveal problems with the house. The contract does, however, ensure the seller takes the house off the market while it’s inspected and appraised. To prove the buyer’s offer to purchase the property is made in good faith, the buyer makes an earnest money deposit (EMD).
How Much Is The Usual Earnest Money Deposit?
In most real estate markets, the average good faith deposit is between 1% and 3% of the property’s purchase price. It can be as high as 10% for highly competitive homes with multiple interested buyers. Some sellers prefer to set fixed amounts to help filter out buyers that aren’t serious. Since the money will serve as monetary damage if the buyer breaches the contract and fails to close, the seller must also carefully consider what amount would adequately compensate for the lost time in selling the home. Just remember if you set the earnest money too high it could scare away potential buyers.
Have Your Real Estate Broker Cash The Earnest Money Deposit
Usually, the earnest money is given in a form of a check. One way that sellers can protect themselves from buyers pulling out of a contract is to require your agent to actually cash the check. The funds will be put in escrow until the real estate deal closes or fails. If the deal fails, having cashed the check will prevent the buyer from cleaning the funds out of the account in which the earnest money check is written.
Know Who Is Holding The Earnest Money Deposit
The earnest money may be held by the seller’s real estate broker, but the money may also be held in escrow by a third-party title company, lawyer, or bank. The purchase and sale contract specifies where the deposit is held. When the sale closes, the earnest money is applied with the down payment and other funds in escrow to purchase the house.
What Does A Contingency Mean In Real Estate?
A contingency is a clause that buyers include when making an offer on a home that allows them to back out of buying the house if the terms of the clause aren’t met. Without a contingency in place, buyers risk losing their earnest money deposit if they decide not to purchase the home after making an offer. As a seller, you need to scrutinize and minimize every buyer’s “back door” addendum and close any that they can.
The four major contingencies in real estate are appraisals, loans, title search, and inspection contingencies:
- Appraisals: When a property appraisal is less than the sale price, a buyer can renegotiate or walk away from the transaction and the deposit is refundable.
- Loans: If the mortgage falls through, the buyer gets his earnest money back.
- Title Search: A buyer can usually void a contract and get their earnest money back if a title search comes back with a lien or issues with ownership of the property.
- Home Inspection: These are one of the most common home-buying contingencies. According to NAR, around 80% of homebuyers include a home inspection contingency in their purchase agreement.
What’s A Contingency Period And How Long Does It Last?
A contingency period is the length of time a buyer or seller has to complete or remove a contingency in a real estate contract. Without the right contingency, a buyer can’t back out of a contract without losing their earnest money deposit. In general, a contingency period will last between 10 and 60 days, depending on the type of contingency, location, sale, and circumstances. The longest contingency period is the mortgage or loan contingency. The seller can add a “time is of the essence” clause to the contract. This means the closing day is binding. If the buyer for any reason can’t close, the contract is breached, and the seller can keep the earnest money deposit.
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