How Earnest Money Works
- money deposited by a buyer to confirm intent to purchase and to ensure buyer best efforts to complete the sale as defined by the contract.
When you make an offer to buy residential real estate you pay a sum acceptable to the seller by way of earnest money. The amount varies based on geography, home price, local regulation and the state of the market at the time of negotiations.
In a real estate market with limited inventory that will typically be referred to as a “Seller’s Market”, your earnest money – or lack there of – can make or break your deal for several reasons.
First, it shows the seller you are legit in your desire to purchase their property. Earnest money, since it is non-refundable in the case of breach of contract (failure to close), shows intention of closing the sale.
Since earnest money deposits can be lost for failure to execute the contract, they indicate a level of confidence to the seller that you are ready, willing and qualified to make things happen. If you fail to meet your obligations as defined in the purchase CONTRACT you can, and sometimes will, forfeit your earnest money deposit.
An EMD should be held by a third-party escrow company according to the terms of the executed purchase contract. The fiduciary responsibility of the agent accepting the earnest money is to deposit the money in the right place.
- Earnest Money is submitted to an escrow company with the accepted purchase contract
- At the close of escrow, the EMD is credited towards the down payment and / or closing costs
- If there are no closing costs or down payment, the the EMD is refunded back to the buyer
A real estate agents’ failure to adhere to the rules and regulations of the state in which the property resides is the most common cause for earnest money confusion.