Our Facebook Friday video question comes in and we talk about earnest money, what is it and what we should know about it.
So, what is earnest money?
Earnest money is a good faith estimate that buyers put down when they make an offer seating they are serious about buying the property and they're willing to put money down on it. It's basically a deposit so that the seller cannot accept any other offers from other potential buyers. You've put money on the deal, you are serious about buying, and the seller needs to honor the offer until or if something else happens to change the offer or the transaction.
How much should we put down?
This really varies because it depends on your current situation, the price of the home, and the negotiated offer. In the past, buyers can legally put down anything they want, including less than $500, and IOU, or even personal property. While this is not done any longer, it still could be legal but, other buyers may put down higher downpayments, which look more attractive to a seller. If the seller is reviewing multiple offers, they're more likely to choose an offer that has a higher down payment or earnest money deposit. A good rule of thumb is anywhere from 1% to 3% of the asking price of the home. This could mean as little as $1000 or as high as $10,000, or even more.
When does it get deposited?
In our Columbus real estate market we have a couple different ways it can be deposited. The earnest money check, cashiers check, or money order, needs to be presented with the offer or at least a copy of the check. This shows that the buyer is serious about the purchase and is willing to put down money. However, that does not get cashed or deposited until either three days after mutual acceptance or three days after approval on the home inspection. The money is typically held by either title, escrow, or the real estate brokerage of the buyers agent. It gets deposited into an escrow account or mutual fund account and is credited toward the purchase of the home on closing. Both are negotiable.
Can you get your earnest money back?
There are a couple of reasons you would want to get your earnest money back. If, after the inspection, the report is not up to your standards and you choose to terminate the transaction based on the inspection, you can get your earnest money back. The expected price range, the buyer can get the earnest money back. If they simply pull out of the deal without a reason or without negotiating with the seller, the earnest money could be lost, but a great buyers agent will typically find a way to get the earnest money back should the buyer change their mind. The earnest money is really a security deposit for the seller. Should the buyer back out for lamer reasons, the seller now has to read list of the property, put it back on the market, advertise it again, and go through the entire process. If the reason for backing out of the transaction is not a legitimate one, the seller is legally entitled to that earnest money for their lost time and emotional stress.
Earnest money is really a major part of the real estate transaction. Even if you're going for a zero down or low down payment home loan, this money will be out-of-pocket as will your home inspection. It's important to have a little bit of money set aside for these funds when buying a home.