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Most sellers like to see an offer accompanied by an earnest money deposit.
It may seem strange to slip some cash to the seller along with your offer to buy a home.
But including an earnest money deposit with your offer is practically mandatory these days, and serves to protect both parties in a real estate transaction.
Including earnest money shows that you’re a serious contender and helps your offer get the attention it deserves.
While competing offers aren’t as common as they were a few years ago, your offer still needs to command a seller’s attention. A solid contract supplemented with a sizable earnest money deposit shows a seller that you have both the resources and the desire to seal the deal. Including a considerable deposit could even help your offer be selected over others.
Keep in mind that as a buyer, you want to gain as many concessions as possible from the seller. The best way to start any relationship is with a showing of good will. An ample deposit serves this purpose, and places buyers in a great position to negotiate more favorable contract terms.
Buyers stand to lose their earnest money if they jump ship on a real estate transaction. Earnest money gives sellers monetary assurance that a buyer won’t back out of the contract without valid cause. Most contracts do have contingencies that allow buyers to walk away from a home (for example, if the house can’t pass inspection or the buyer can’t qualify for financing). But if a buyer decides not to go through with the sale for a reason that is not written into the contract, earnest money is generally forfeited to the seller.
The amount of earnest money will vary according to your area, seller and price of home you are considering. The best way to determine local customs is to talk to an experienced real estate agent. Some agents suggest including a percentage of the sales price, while others recommend a flat fee ranging from $500-$2,000.
Most agents agree that buyers should include an amount that will be taken seriously, but not so much that a buyer’s finances are at risk. It’s rare that a buyer should have to forfeit their earnest money deposit, but it can happen.
The terms of the contract decide where earnest money lands if the contract is broken. Let’s say that a buyer’s contract has made the final purchase contingent on the results of an inspection. If the inspection reveals problems that are unacceptable to the buyer, the buyer can walk away from the home with his earnest money in tow. If the buyer backs out just due to a change of heart, the earnest money will be transferred to the seller.
A good contract with proper contingencies is essential in protecting your earnest money deposit. Make sure to work with a reputable, experienced real estate agent when crafting your offer.
Earnest money is paid by check at the time of your offer. Each state has very strict rules on how this deposit is managed until the transaction closes. Generally, these funds are held in an escrow account managed by the buyer’s real estate agent. The deposit is then applied to the sale of the property at closing.
Earnest money funds are usually applied to a loan’s closing costs or to the down payment. Since VA loans don’t require a down payment and closing costs are normally paid by the seller, many VA loan recipients end up getting their earnest money back.
Photo courtesy of quaziefoto
4 Comments
I will not recommend a large earnest money deposit to my clients. No matter the contract provisions, just as a buyer can opt out for any reason during due diligence, the seller can dispute the earnest money for no reason. That dispute automatically ties up the earnest money for months. The buyers offer is either strong in itself or it isn’t.
Thanks for sharing, Jeff. Always good to hear feedback from our readers. Do your buyers typically include a smaller earnest money deposit, or none at all?
During the buyers inspection, the A/C is not functioning. The inspector determines that the A/C is too small, i.e. 3 ton rather than 4 ton. The seller repairs the A/C and the A/C functions and cools the house. Can the buyer demands that the A/C be replaced with a 4 ton A/C or he will not close. What if seller refuses to change the A/C? Can the seller cancel the contract and retain the earnest money?
Hi Robert – Thanks for the question. The buyer can demand anything he/she wants. But it’s always the seller’s right to refuse. As to the return of the earnest money, check your contract. If the contract was made contingent on the A/C being replaced, earnest money should go back to the buyer. If the contract was contingent on repair, the buyer is probably not entitled to a return of earnest money. Check with a real estate attorney should you need additional advice. Thanks again!