The issue of earnest money deposit is one of the most misunderstood parts of the home buying process. Many homebuyers don’t know why they pay it or the conditions that may cause them to lose it to their sellers.
In line with our tradition of explaining complex real estate concepts, we present this all-you-need-to-know article on earnest money deposits.
What is Earnest Money Deposit?
An earnest money deposit is a form of security deposit you give to a home seller to demonstrate your commitment to buying their house.
Although it is not mandatory, this money is important because it gives you an edge over other buyers, especially in a competitive real estate market. Sometimes, sellers won’t agree to a deal without this money. They see it as an assurance that a buyer won’t unnecessarily pull out of the transaction.
How Much Earnest Deposit Money Should You Put Down?
The amount of earnest money deposit to put down largely depends on the factors involved. Factors like the home value, state laws, and other interested buyers largely determine the amount you pay.
However, the required deposit averagely ranges from 1%- 10% of the sales price. That is, if a home is valued at $350,000, the earnest deposit will be between $3,500- $35,000.
This deposit is usually paid in cash after both parties agree to the transaction.
Who Should The Earnest Money Be Paid To?
As a buyer, you are to pay the earnest deposit money to a third party agreed to by the seller. This third party deposits the money into an escrow account until the transaction is complete.
If the transaction goes without a problem, the buyer gets the money back and may use it as part of their closing cost. On the other hand, if there is a breach of contract by the buyer, the seller gets the money.
How Can I Protect My Earnest Money Deposit?
The real estate market is not exempted from fraud. You can avoid losing your earnest money deposits from criminal elements by following these tips:
- Do not pay the deposit directly to the seller.
- Pay only to a reputable third party (real estate brokerage, escrow company, or legal firm.)
- Make sure the third party deposits the funds into an escrow account and obtain a receipt.
- Do not authorize the release of the earnest money deposit until the deal is completed.
- Contact the necessary authorities if you feel something suspicious is going on with your earnest money deposit.
Common Ways People Lose Their Earnest Money Deposits
Earnest deposit money serves to protect you and the home buyer in the event of a failed transaction. But you need to be careful about your purchase contract conditions before putting the money down. Not doing so may cause you to lose your earnest deposit money.
Some of those situations that may cost you your earnest deposit money are:
1. Failure to meet the contract deadline
One key feature of every purchase contract is the deadline. There is a timeline for almost everything on it: finance, inspection, contingencies, etc. As a buyer, you will lose your earnest money deposit if you fail to meet up with any of these stipulated deadlines.
Although some home sellers may agree to extend the deadline to accommodate you, you shouldn’t bank on your seller’s goodwill to save you from losing your deposit.
2. Consenting to a non-refundable deposit
In some cases, home sellers require the buyers to agree to a non-refundable deposit. This requirement usually involves bank-owned or investment properties and is in place to ensure that only serious buyers show interest in the house.
If you agree to this condition, you should consider your deposit gone. To avoid signing away your rights to a refund, you should study the purchase contract before signing.
3. Personal problems
If you decide against following through with the contract due to personal issues, say goodbye to your deposit. Although the problem may be terrible (e.g., illness), your seller is not obligated to pay it back.
4. Deciding against buying the home
No contract clause allows you to back out because you realize the house isn’t the right fit or because you found a “better” home. So, you should be prepared to lose your earnest money deposit if you opt-out of the transaction due to those reasons or any other reason not stated in the purchase contract.
5. Waiving your contingencies
Real estate purchase contracts have contingencies that allow buyers to opt out if things aren’t the way they want. But sometimes, buyers exclude some contingencies to convince the seller to transact with them, especially in a multiple offer situation.
If you have waived off your contingencies and later discover that the home has issues, you will have to sacrifice your deposit to back out of the deal.
6. Mutual contract voids with no refund
Agreeing to a mutual void with no refund would see you lose your money even though both parties agree to end the agreement. In most cases, this type of deal is not advisable. However, we suggest you consult your real estate agent or attorney before agreeing to such a deal.
The earnest money deposit is one of the most important but misunderstood parts of a real estate deal. In this guide, we explained the necessary details about it. Perhaps, the most important tip is for you to seek professional help.
Here is where we come in. Having an agent like Bost Redevelopment in your corner automatically increases your chances of getting the place of your dream. We will also provide all the support you need throughout the house buying process, saving you from stress and bad contract situations. Lastly, we will negotiate with the seller to make sure you get a favorable deal.
Want to talk more about your options? Please leave us a message below with your contact information and let us know how we can help you.