Want to show the seller you’re seriously interested in buying his or her home?
Brokers say the best way to get that message across is to attach a large check – part of the earnest money – to your offer for purchase.
Appropriately named, earnest money demonstrates the buyer’s level of commitment to closing the deal and purchasing the home. Why? Because that money is forfeited to the seller should the buyer decide capriciously not to buy the property.
Earnest money is important to a transaction because it shows the seller that the buyer is operating in good faith (hence the name, ”earnest”). The bigger the deposit, the more reassuring it is to the seller who will believe that the buyer is very serious. It also ties the buyer to the property and keeps him or her from looking for additional properties.
On the Offer to Purchase, the earnest money is also called a deposit. Every seller hopes that the buyer will offer 10 percent of the sales price of the house in cash. That amount is large enough that it will make any buyer think twice about walking away from the house on a whim.
But don’t worry if you can’t scrape together 10 percent in cash. Buyers, especially if they are first-timers, rarely put down 10 percent on a home. Five percent of the sales price is considered an acceptable amount for the earnest money.
Brokers say that anything more than several months rent works as earnest money. The important thing is that you offer earnest money, even if it is a $500 check.
Often, a buyer will attach a $1,000 check to the Offer to Purchase to show additional good faith. The rest of the deposit, or earnest money, is due when the contract is signed by both parties.
Who holds the earnest money?
Earnest money typically goes into an escrow account held by the seller’s broker, but this is largely a matter of local custom or can be negotiated. The buyer usually receives the interest on his or her money.
If the sale goes through, the earnest money plus interest is often used as part of the cash down payment required by the lender. Sometimes it is used as a credit toward closing costs. If the sale does not go through for some reason (if, for example, the buyer could not get a mortgage or the title on the property was bad) the seller will sign a release of escrow and the earnest money is refunded to the buyer.
What if the seller won’t sign the release of escrow?
If there is a fight between the buyer and the seller over the earnest money, the broker holding the funds might turn them over to your local real estate commission for mediation. Ask your broker to explain your state law and local customs regarding this matter.
Published: Jan 10, 2005