August 3rd, 2017 5:08 AM by Jackie A. Graves, President
When you’ve found that perfect home and are ready to make an
offer, there’s a surefire way to let the seller know you mean
business — make sure you include an earnest money deposit.
But what is earnest money? Earnest money is a
deposit you pay to show the buyer you’re serious about the transaction.
“Earnest money is what shows your good-faith intent in a transaction,” says
Cara Ameer, broker associate and real estate agent at Coldwell Banker Vanguard
Realty in Ponte Vedra
Beach, FL. “The seller sees your financial skin in the game
Both the buyer and the seller want to make
sure the deal goes through, and an earnest money deposit helps give the deal
solid footing. It’s important to understand what earnest money is and how
it can affect your transaction when buying a home.
No. But money talks —
and deposits keep buyers from changing their minds.
“A buyer will think
twice about [backing out] if they’ve [got] a lot of money tied up in this
[deal],” says Ameer. That kind of built-in financial security makes sellers
feel more at ease when accepting an offer.
Earnest money amounts
vary by area and can range from 1% of the home purchase price to 5%, depending
on the type of home you’re purchasing.
“The bigger the
purchase price, the bigger the binder needs to be,” says Ameer. “If you’re
purchasing a $1 million house, you would need to put more — or what the seller
You don’t need to pay
everything at once, though. If your seller wants a $50,000 deposit, you can
negotiate to give $25,000 upfront and another $25,000 after successful
completion of any due diligence period.
Earnest money for new
construction can be
as high as 50% of the purchase price, but there’s a good reason why developers
ask for extra cash. They often front construction costs or borrow funds from a
bank, which may want proof that units are sold to qualified buyers.
Developers don’t want
buyers to walk away either. Homes customized to a particular buyer’s tastes can
have higher construction costs and may not be easily remarketed if the buyer
changes their mind.
Real estate contracts
dictate timelines and responsibilities for both buyers and sellers. Buyers risk
losing their deposit when they don’t comply with the contract’s terms, and
sellers lose valuable marketing time.
can fall through for many reasons,
such as if a buyer can’t get financing (provided there’s a mortgage
contingency), or if a buyer decides not to follow through with the purchase
after an unsatisfactory inspection.
depending on the market, a seller may negotiate that the deposit is
nonrefundable after a certain number of days. Agree to this only if you can
take the risk since as a buyer, you could be giving up your money if you decide
to walk away from the property.
“In some housing
markets with multiple offers, you may want to [agree to a nonrefundable
deposit] to make your offer more attractive, or the seller may counter with
asking for a nonrefundable binder,” says Ameer. “This is where your agent’s market
knowledge will come into play.”
If a deal closes
within the contract’s timeline and you’re able to provide documentation, you’ll
likely get your money back or, depending on the agreement, it will be applied
as a credit toward the purchase price of the home.
But every situation
is different, and issues can and do arise. “As a consumer, you have to ask your
agent how [disputes] are handled,” says Ameer. “It depends on the dispute
When a title company
or an attorney’s office holds the deposit in escrow, parties often use
mediation or go to small claims court to resolve disputes, which can be pricey.
“You have to weigh
the cost of mediation and settling versus going to court, which can be very
expensive,” says Ron Shuffield, president of EWM Realty/Christie’s International Real Estate in Miami,
The broker, a real
estate attorney, or a title company “holds” your earnest money deposit. But
none of those parties get to keep the money.
One of three
scenarios will occur: The buyer has refunded the money because of failed
contingencies; the deposit is applied to the purchase price or refunded to the
buyer when the sale closes, or the seller receives the deposit because the
buyer backed out of the deal for reasons not covered in the contract.
If you back out of
the agreement for reasons not covered under your contingency agreement, you may
not get your deposit back. Be sure you fully understand how failed
contingencies affect both you and the seller to avoid confusion and heartbreak
It may seem as if
you’re throwing away money if you forfeit your deposit, but there are financial
considerations on the seller’s side when you walk away. As soon as the seller
accepted your offer, they may have rented or purchased a new home or put
furniture in storage — and they definitely will not accepting other offers.
“There’s a lot of
dominoes that have to fall into the right places when you’re purchasing
property,” says Shuffield. “If everyone doesn’t follow through with what
they’re supposed to do, it creates expenses.”
Andrea Murad - To view the original article click here