After looking for the perfect home, you’re ready to make an offer and show the seller you’re a serious candidate. When doing so, be sure to include an earnest money deposit.
What is earnest money? It’s a deposit you pay to show the seller you are serious about the purchase of the home. “Earnest money is what shows your good-faith intent in a transaction,” says Cara Ameer, broker associate and real estate agent at Coldwell Banker Vanguard Realty in Ponte Vedra Beach, FL “The seller sees your financial skin in the game up-front.”
The buyer and seller are looking forward to the deal going through and an earnest money deposit gives the deal high chances of going through. Which is why it’s important to understand what earnest money is and how it affects your home buying transaction.
- When buying a home, is earnest money a legal requirement?
No. However, a deposit helps buyers from changing their minds.
“A buyer will think twice about backing out if they’ve got a lot of money tied up in this deal,” says Ameer. Having that financial security makes sellers feel more confident about accepting an offer.
- How much money is needed for an earnest deposit?
The amount depends on the area and can range between 1-5% of the home purchase price.
“The bigger the purchase price, the bigger the binder needs to be,” says Ameer. “If you’re purchasing a $1 million house, you would need to put more — or what the seller asks for.”
Keep in mind that, you won’t need to pay the amount all at once. If the seller is asking for a $50,000 deposit, you can try and negotiate giving half ($25,000) and the remaining $25,000 after all legal requirements are satisfied.
- Most new construction require higher deposits. Why is that?
For new construction, earnest money can be up to 50% of the purchase price but with good reason. Developers ask for extra cash because they often front money or borrow funds from banks for construction costs and may want proof that units are sold to qualified buyers.
Also, developers don’t want buyers walking away from a deal either. Customized homes can have higher costs for construction and in some cases, cannot be re-marketed if the buyer changes their mind.
- Are deposits non-refundable?
Real estate contracts give timelines and responsibilities for both buyers and sellers. If buyers do not comply with the terms of the contract, they risk losing their deposit while sellers lose valuable marketing time to get their home sold.
Contracts can fall through for many reasons. For example, if a buyer is unable to get financing or if a buyer decided not to continue with the transaction because of an unsatisfactory inspection.
Also, depending on the market, a seller can negotiate having a non-refundable deposit after a certain amount of days. Accept these terms only if you can risk losing your deposit if you later decide to walk away from the deal.
“In some housing markets with multiple offers, you may want to [agree to a nonrefundable deposit] to make your offer more attractive, or the seller may counter with asking for a nonrefundable binder,” says Ameer. “This is where your agent’s market knowledge will come into play.”
- How are disputes handled?
If a deal closes within the timeline of the contract and can also provide proper documentation, you are most likely to get your deposit back. Or it can go towards the purchase price of the home, it just depends on the agreement.
However, each situation is different, and issues can and do arise. “As a consumer, you have to ask your agent how [disputes] are handled,” says Ameer. “It depends on the dispute resolution process.”
When an attorney’s office or title company hold the deposit in escrow, parties will go to mediation or small claims court to resolve disputes, which is a more expensive route.
“You have to weigh the cost of mediation and settling versus going to court, which can be very expensive,” says Ron Shuffield, president of EWM Realty/Christie’s International Real Estate in Miami, FL.
- Who keeps the money?
Your earnest deposit is held by the broker, real estate attorney or title company. But neither parties keep the deposit.
One of these three scenarios will occur:
- Buyer refunds the money because contingencies were not met.
- The deposit goes towards the purchase price or refunded to the buyer when the sale closes
- The buyer walked away from the deal for reason not covered by the contract, so the seller receives the deposit.
- Is it ever fair to forfeit a deposit?
When backing out of the agreement, for reasons other than stated under your contingency agreement, there’s a high chance that you won’t get back your deposit. Make sure to have a clear understanding of your contract and how it affects you as a buyer and the seller as well.
You may have just lost your deposit but the seller may be losing out as well. They may have already put money down for a new home and have all their belongings in a storage space that is now another expense until they can sell their current home. But they are likely starting the process all over again.
“There’s a lot of dominoes that have to fall into the right places when you’re purchasing property,” says Shuffield. “If everyone doesn’t follow through with what they’re supposed to do, it creates expenses.”