Friday, October 29, 2010

How much earnest money should I offer?

WHAT IT IS

Think of earnest money like a deposit. Sometimes buyers need to send a copy of their earnest money check with their offer, sometimes not. Your Realtor will know when you need a copy of a check.

Regardless, once the buyer's offer is accepted, the earnest money must be sent to the title company, who will cash the check.  Once cashed, the earnest money becomes part of the total purchase price of the house.

HOW MUCH IS RIGHT?

A lot of buyers ask "How much earnest money is the right amount?"

There's no "right" amount. And the amount of earnest money sellers expect and buyers offer moves up and down with the strength or weakness of the market. When prices were soaring and sellers could get multiple offers within 3 minutes of putting a For Sale sign in the yard, earnest money amounts soared too. I saw $25,000 earnest money on a $250,000 purchase.

These days prices are lower and buyers in many market segments have the upper hand. Earnest money amounts have generally dropped. I've seen $500 earnest money checks lately (Fall 2010).  I've seen amounts up to $3,000 too.

RULE OF THUMB

One rule of thumb about earnest money is, "put up as much earnest money as you can afford to risk." The idea of risk 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 for any reason other than the many allowed reasons, the seller has the right to keep your earnest money as compensation for the lost time on the market.

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