What is earnest money?
Earnest money is money that shows the seller of a property that the buyer under contract is “in earnest”–serious–about the purchase. The money is usually 1-2% of the total purchase price, and goes into an escrow account after the contract is agreed to by both parties.
How much should my earnest money be?
The amount that you offer in earnest money is part of the original offer that you make for the property. It is usually 1-2% of the total purchase price, but there are some further considerations to think about when determining the amount of earnest money to offer. If you are in a competitive housing market, offering more money could make your offer more attractive to a seller. At the same time, you don’t want to offer an amount that is needlessly high (over 5%, as a rule of thumb) because you want to protect your assets too in case the deal falls through.
What happens with my earnest money?
After both parties have signed the Purchase and Sale Agreement, they are under contract and the buyer will need to deposit earnest money, usually at the title company. Your real estate agent will tell you the timeline and remind you when and where to deposit the check. The money then sits in an escrow account (neutral third party) until the closing, at which time it will go towards the buyer’s down payment and/or closing costs. Do not ever give your earnest money check directly to the seller.
If the closing does not end up happening due to buyer’s contingencies such as inspection or financing, the earnest money should go back to the buyer. If the closing doesn’t happen because the buyer walks away at the last minute due to other reasons besides those outlined in the contingencies, the earnest money is supposed to go to the seller to offset the cost of having lost time that the house could have been on the market. However, cancellation fees might need to be deducted from the earnest money deposit if the contract is voided, and both parties will need to agree on how the funds get disbursed since it’s held in trust. Disagreements on where the money should go can result in further complications and legal fees, so it is best to have representation from a professional real estate agent who can speak authoritatively on your behalf.
As an experienced real estate agent, I will know exactly how to guide you, whether you’re on the buying or selling side. I will help you understand the contingencies in place on your Purchase and Sale Agreement, and how they affect your decision-making timeline. My knowledge will ensure that you avoid pitfalls that can come from mishandling earnest money, for a smooth transaction from contract to closing!