What is Earnest Money?
Earnest money is provided by a buyer at the time a contract is accepted. It’s purpose is to provide some real investment as a promise that the buyer is serious about buying the property and has money available to do so. The amount of earnest money is a point of negotiation, but the typical amount expected is between 1/2 and 1% of the purchase price (so for a $200,000 offer, earnest money should typically be between $1,500 and $2,000). Earnest money is intended, frankly, to be offered as a sign that they buyer is serious (“earnest”) about buying the home. Earnest money is usually a personal check but can also be a certified check from a bank. It will be made out to the designated holder, usually the Real Estate Agency of the Seller’s Realtor or a designated attorney or Title Company. The money is to be held in an escrow account until closing.
When is it Due?
This will be specified in the Purchase Agreement, but typically the earnest money is to be delivered to the designated holder of the funds within 48 hours of an accepted offer. What I typically due is ask that my buyer’s write the earnest money check when we sign the offer and I attach a copy of the check to the offer. I will then deliver the check on your behalf to the office of the Seller’s Agent within the required time if our offer is accepted. It may be, however, that our initial earnest money offer is countered (in other words, the Seller may ask for a larger amount of earnest money – this often happens if the Seller has previously had a deal fall apart) and if that occurs and we agree, I will need to meet with you again to get a different check. If our offer is not accepted, I will return your check to you at our next meeting.
What happens to it once it leaves my hand?
The check WILL be cashed so this is important for you, the buyer, to know. But the money will simply sit in an escrow account until closing. It is cashed to prove that the funds were truly available, but no one makes any money off the money as it sits in the escrow account (escrow accounts do not bear interest and no one can use the money for anything – it simply is a place for holding the funds until closing). The money stays with in the escrow account until closing, and at that time it shows as a credit to the buyer. In other words, if you agreed to pay $200,000 for a home, at closing you will only have to produce funds or loans to cover $198,000 for that home – the earnest money will be shown as a prepaid credit to you on the closing statement.
Do I get it back if the deal falls through?
You may, it depends on how the deal falls apart. If the deal is not completed because the Seller does not abide by Seller’s agreement then yes. For example, if the Seller decides they are not going to sell or if they refuse to repair a major issue discovered at inspection (such as a leaking roof or a damaged foundation that makes the house unsafe or un-sellable) and as a result the transaction does not close – in those instances the earnest money should be returned to you. However, if the deal falls apart based on the buyer’s side in a way not contractually covered (i.e. you want them to repaint the house, which is not a structural or safety issue and they say no so you don’t want to buy it anymore) then the Seller has a right to keep the earnest money. If there is a contractual cause for the buyer to fail to complete his transaction (examples might be that the loan does not come through at the terms agreed upon in the PA, or the Seller refuses to address major issues of safety, health, or structure or has been dishonest on the Seller’s Disclosure) then the EM may be returned.
When there is a conflict over who should have the Earnest Money, a process ensues. We can ask that your EM be returned, but it can be a lengthy process and you may even have to go to small claims court if the circumstances are not straightforward and agreed upon by all parties. Understand that this negotiation happens after a transaction has fallen apart, so it can be a contentious and slow process, even when the earnest money is eventually returned.
More questions about this topic? Get in touch with me and I’ll be glad to talk more with you about this or any other questions you may have about the buying process: