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All About Earnest Money

When you make an offer to buy a house, the seller may ask you to remit money as an earnest deposit. Most purchase contracts stipulate a specific amount of earnest money to be given by the buyer along with the offer. What is an appropriate amount? Will the money be refunded if the purchase is not completed? It’s important to understand the purpose and legal considerations before handing over a check.

Earnest money is a good-faith deposit, not to be confused with a down payment. Your earnest money tells the seller you are serious about completing the purchase. A down payment, typically anywhere from zero to twenty percent is paid at closing, and counts as payment toward the house.

You can negotiate how much of an earnest deposit to pay with the seller, though many buyers don’t realize that it’s negotiable. Two to three percent of the purchase price is a typical amount; so $6,000 to $9,000 may be requested for a $300,000 house. The typical percentage of earnest money deposit varies across the country and depending on the specific market conditions. Some markets even see typical earnest money deposits up to five percent of the purchase amount.

In order for a contract to be legally valid, there must be an offer, consideration, and acceptance. The amount of consideration, in the form of the earnest money deposit, can be as little as $1, however, if accepted by the buyer. If the property has generated a lot of interest, you may entice the seller to accept your offer by changing the terms, such as providing a greater amount of earnest money than other offers.

If the seller accepts your offer, a licensed real estate agent will give take your earnest deposit and give it to the broker or an attorney to deposit directly in a trust or escrow account. Do NOT give your check directly to the seller. Your earnest money will remain in the account until the close of escrow.

Once the seller accepts your purchase offer and earnest money, you and the seller must meet certain conditions. If the seller backs out of the contract, you are entitled to a refund of your earnest money. Additionally, if the contract is terminated due to new information such as the discovery of a material fact about the property that was not disclosed earlier, and you change your mind, you may be able to get your earnest money back.

The laws regarding earnest money vary from state to state. In most states, a buyer may cancel the transaction within a specific period of time without penalty. Once the grace period has passed, the seller may be allowed to keep all or part of the earnest money, as stated in a “liquidated damages” clause in the contract.

Before signing a purchase contract and providing earnest money, thoroughly read the contract. Ask your real estate agent, broker or attorney to explain anything you don’t understand. The extra time you spend may save you a lot of money in the long run.

Published or updated on May 24, 2010

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.


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