Wednesday, December 19, 2007

Earnest Money

money-under-magnifying-glass.gifA really common question I'm asked by buyer clients (especially first time buyers) is, "How much earnest money is the right amount?"

Technically, I'm not supposed to tell you. At least that's what I remember from my rookie training classes. If I'm remembering correctly, I think this was a rule dreamed up by the legal eagles in our profession. They worry that if Realtors simply tell clients what to offer, how much to put down, how much earnest money to offer and so forth. . . . well, we're essentially price fixing and could be sued later by disgruntled buyers who are having buyer's remorse.  I used to be a paralegal and have lawyers in the family, so I'm pretty ultra-sensitive to the myriad of ways agents get themselves sued.

Since I like to keep on the right side of my company's legal department, and since I haven't got a brass farthing worth suing me over, I won't state a 'proper' earnest money amount here. But I'll explain what's typical, and what earnest money is and does.

Earnest money is the amount of money a buyer submits with an offer to purchase a house. You actually write a check and send it (actually, usually it's a xerox copy of the check) with the purchase offer sent to the home seller. Earnest money proves the buyer is 'in earnest', or serious about buying that house. If the seller accepts the offer, the earnest money is immediately deposited with the escrow/title office. It becomes part of the purchase price of the house.

For example: Buyer looks at a house with an asking price of $299,900. Buyer makes an offer of $280,000. That $280,000 is made up of - (1) $3,000 earnest money, (2) $40,000 cash down payment, and (3) a promise to get a home loan for the remaining $237,000. The earnest money amount I'm using here is typical. Most of the buyers I've worked with feel comfortable offering about 1% to 2% of the purchase price as earnest money.

Once the contract is accepted by both buyer and seller, the buyer's Realtor sends the earnest money to the escrow company. A personal check is usually acceptable for earnest money.

One rule of thumb about earnest money is, "put up as much earnest money as you can afford to risk." The risk bit is important. Earnest money is forfeitable if the buyer breaches the contract. In plain English this means that if you, the buyer, back out of the purchase after your Due Diligence period, the seller has the right to keep your earnest money as compensation for the lost time on the market.

Related Posts - see all FAQ file posts here