by Dell Claiborne
What is an earnest money deposit?
An earnest money deposit can also be called a good faith deposit, and let me start by telling you what an earnest money deposit is not: It is not a down payment. Many times when I meet with clients, they’ve confused the two. An earnest money deposit is money that accompanies a real estate purchase agreement to secure the contract and to let sellers know that you are a serious buyer. There is no set amount or limit on the amount of an earnest money deposit. They can be as small as one dollar. I will say that a larger earnest money deposit can often distinguish an accepted purchase offer from one that is rejected. Sellers will perceive the higher EMD to mean that the buyer is more serious. That being said, the goal for you should be to decide on an amount that is not so low that the sellers don’t consider your offer a serious one, yet not so high that you tie up a large amount of cash. A rule of thumb that I use with clients is the EMD should be $1000 for every $100,000 of the offered sales price. For example: On a sales price of 150,000, the earnest money deposit would be $1500. Once an offer is accepted, the earnest money deposit is placed in an escrow account. This money now belongs to both the buyer and seller. Review your contract to see how it determines the EMD is handled. Earnest money is held in escrow or trust by a real estate brokerage or attorney. This person or company is known as the escrow agent. Earnest money deposits should not be described as “non-refundable”, because under some circumstances, the buyer’s funds can be refunded.
Earnest money deposits are distributed according to the conditions of the purchase contract. Usually, at the completion of the sale, funds will be credited as part of the purchaser’s closing costs. In the event of default by either party, the terms of the purchase contract will determine how and if any earnest money is credited to the non defaulting party. When both buyer and seller agree to terminate or release the purchase contract, both parties must notify the escrow agent in writing, to instruct how to distribute the funds.
Remember, when buying and selling real estate, it is important that you understand all the terms of the agreement. When you have questions, ask a Realtor. Send your questions to email@example.com.