Earnest Money: “Are You a ‘SERIOUS’ Real Estate Buyer?”
June 9th, 2007 by Rich Jacobson
ear·nest 1 adj.
1. Marked by or showing deep sincerity or seriousness.
2. Of an important or weighty nature; grave.
Idiom: in earnest
1. With a purposeful or sincere intent.
2. Serious; determined.
ear·nest 2
1. Money paid in advance as part payment to bind a contract or bargain.
2. A token of something to come; a promise or an assurance.
(Not to be confused with THIS Ernest!)
WHY DO WE NEED TO OFFER EARNEST MONEY?
There seems to be a lot of confusion these days about Earnest Money, even among those who have previously purchased a home. As many States may differ as to what is considered a normative practice for providing Earnest Money, it’s good to know ahead of time what to expect in your particular market area. Make sure you consult with your Real Estate Agent before you begin the home search process.
Based on the definitions stated above, in a real estate transaction, Earnest money accomplishes a number of things:
- It conveys the seriousness of your intent to purchase the property. Sellers want to know that you’re genuinely interested in buying their home. Accepting your contract offer will require them to remove their home from active status, and lose valuable market time.
- In some instances, it can help to demonstrate your financial ability to satisfy the contract and strengthen your position as a solid, qualified buyer. This can be especially important when competing with another offer or in multiple bid situations.
- It provides remedial damages for the Seller in the event that you breach the contract (monetary compensation for backing out of the contract for a reason not stipulated in the contract)
HOW MUCH IS ENOUGH?
The actual amount of earnest money will vary from market to market. In many instances, it will represent between 1 to 2 percent of your offer price. If you are involved in a competing, or multiple bid offer, an increased amount of earnest money may make the difference in you being the successful bidder.
WHAT HAPPENS TO OUR EARNEST MONEY?
If your offer is accepted, your earnest money will be deposited into a trust account or with the escrow company, shortly after mutual acceptance. At closing, this money is then applied to your closing costs, or, if your closing costs have been covered, it will be refunded to you at closing. In most home purchases, Earnest Money is money you would normally be spending anyway.
CAN WE LOSE OUR EARNEST MONEY?
One of the main instances where you can lose your earnest money is if you deliberately and willfully back out for a reason that is not specificed within the contract. This is referred to as a “breach of contract.’ As a Buyer, there are normally a number of contingenices that are built into every real estate contract that serve to protect your interests. Your Agent can best explain these to you and counsel you accordingly.
CAN’T WE JUST USE A PROMISSORY NOTE?
Using a promissory note in lieu of actual cash reserves often communicates that you really aren’t a serious, viable Buyer, and that you probably don’t have the financial means to satisfy the contract. Even though there may be many loan products available that allow you to purchase a home with little or no money down, you should plan to save enough money to offer an acceptable earnest deposit, as well as to cover any other ‘out of pocket’ expenses normally incurred in a home purchase.
Share on Facebook
No related posts.
[...] 6- Sparky in Puget Sound writes:Earnest Money: “Are You a ‘SERIOUS’ Real Estate Buyer?” [...]
[...] 6- Sparky in Puget Sound writes:Earnest Money: “Are You a ‘SERIOUS’ Real Estate Buyer?” [...]
Great article. It’s good to see some articles that share information about protecting the seller. We always see articles about protecting the buyer.
Rich, this is a great article and it prompted me to write a related one. Thanks for the inspiration!
–Buckwheat
[...] This dynamic allows real estate buyers to get more aggressive with their negotiations. Good for the buyer; hard on the seller. Real estate sellers, faced with the prospect of receiving less money for their home or investment property, naturally want to know that the potential buyer can actually purchase. Rich’s article on the subject of Earnest Money, addresses one of the tactics for proving a buyer is serious about buying. This article addresses a way to prove a buyer can purchase. [...]