You’ve probably heard of earnest money if you’ve ever bought or sold property. But if you haven’t done either, you probably don’t have a good grasp of what earnest money is, how it works, and whether it goes to the buyer or the seller. If you’re in this second camp or just want a refresher, I’ll provide you with a quick rundown today.
What is earnest money?
Earnest money is the initial, good faith deposit that you put down on a piece of property when you get ready to make an offer. This can be any amount—it could be $1, $10,000, or even $50,000, depending on the size and scope of the deal. The general rule of thumb for our market is about 1% of the asking price.
How does it work?
When you make an offer on a house and it’s accepted, you’ll make your earnest money deposit out to the real estate brokerage you’re working with. That broker holds the money in a trust account, meaning it’s still your money, it is just sitting in their account. It’s then allocated to an account separate from their operating account. As long as you continue forward with your purchase, your earnest money is applied back toward the down payment on the house. If, for some reason, you get cold feet and back out at the last minute, then most often the earnest money goes to the seller as liquidated damages for your breach of the contract.
If you want to do a home inspection to make sure that you can get your loan, we build that feature into the contract to protect your earnest money. Typically, we’ll put in 10 to 15 days for due diligence, which gives you an opportunity to inspect the house and make sure that you want to move forward with the purchase. If you terminate the contract during this due diligence period, the earnest money will go back to you. You’re completely safe during that time.
Additionally, if you have a financing or appraisal contingency and your loan isn’t approved or your house doesn’t appraise, you will also get that money back, so long as it was during that contingency window. It’s only after the contingencies are over and the closing date is drawing nearer that the seller would keep the earnest money as compensation for their trouble if you were to drop out suddenly.
If you have any questions about earnest money or other real estate topics, don’t hesitate to reach out to me. I’d be glad to speak with you.