Friday, 8th of May 2009 at 11:49:58 AMThis topic comes up on every transaction, what is it, how much, do I give/get it back if the deal falls through? It is an important part of the offer so it deserves some thought and consideration during the stage to make an offer. Both the seller and the seller’s agent will look at the Earnest Deposit as a gauge of the seriousness of the offer. If two offers come in at the same purchase amount, ability to close and contingencies, the one with the higher Earnest Deposit will be favored.Why? Because if the seller gets cold feet, the buyer keeps the Earnest Deposit as compensation for taking the home off the market, time to work on the transaction and all the other headaches associated with an offer falling through. So the seller will want to have a higher compensation in case of problems later one.
Does the seller always keep the Earnest Deposit? No, if for example during inspection a material fact was found to be wrong with the house and the buyer and seller can not agree to a remedy, the contract can be cancelled and the buyer is entitled to a refund of their Earnest Deposit.
Another situation that can come up is if after all the hard work, the buyer losses their job and unable to get financing for the new home, the contract is cancelled and the Earnest Deposit is refunded.
If on the other hand, the buyer decides that they don’t like the kitchen cabinets, even though they saw them before making the offer. Well, in this case, the seller is entitled to request the Earnest Deposit. Why? Because the fact for cancelling the contract wasn’t something discovered, it was already known when an offer was made. It’s like taking the car back to the dealer and saying that I don’t like it because I wanted black and it’s red. You knew that when you bought the car.
How much should an Earnest Deposit be? Ask 5 Realtors® that question and you’ll get 6 answers, all of them will probably start with depends. A quick answer is that an Earnest Deposit should be no less then $1,000 and should be around 1% of the offer price. Again, the Earnest Deposit is an indication of how serious you are about the purchase of the home. The more money, the more serious the buyer will consider your offer. Another part of the equation is the risk associated with the purchase, for investments, sometimes the purchase is pretty risk and I’ll only offer less money than the guideline provided (warning: I have lost deals because I offered too low of an Earnest Deposit).
How does the Earnest Deposit work? When an offer is being drafted, the buying agent will ask for a personal check for the amount to be made out to the Title Company. The buyer’s agent will make a copy of the check to include with the offer and keep the check until either the offer is accepted and he takes it to the title company to open Escrow, or the offer fails and the check is either returned or destroyed at the instructions of the buyer.
John Wake, another valley agent, did an entry on this topic as well, you can gain another agent’s perspective from it.
Related posts:
I had a conversation with a Realtor today who liked to have his clients put much more money forward as an earnest deposit as it told him that they were serious about the property and kept them committed.
My approach has always been to put the least amount forward on the buyer’s behalf while still being taken seriously on the offer. If the deal should go south at all, the buyer is at less risk here. So, as a rule, I don’t ever recommend just throwing a lot of earnest at the seller. Even though there are a lot of potential outs for the buyer, it still is money at risk.
Great post here and timely for me given the conversation today.
David Lorti