Earnest Money in Contract: Understanding the Basics

When it comes to purchasing or selling real estate, an earnest money deposit is an important aspect of the transaction. It shows the seller that the buyer is serious about the purchase and is willing to put down money upfront to prove it. In this article, we’ll explore the basics of earnest money in contract and what you need to know as a buyer or seller.

What is Earnest Money?

Earnest money is a deposit made by the buyer at the start of a real estate transaction. It shows the seller that the buyer is committed to purchasing the property, and the amount is usually a percentage of the purchase price. The money is held in an escrow account until the sale is completed, at which point it is applied to the sale price.

Why is it Important?

Earnest money is an important aspect of a real estate transaction as it shows the seller that the buyer is serious about purchasing the property. Without earnest money, there is a risk that the buyer may back out of the transaction, leaving the seller in a difficult position. By putting down a deposit, the buyer is showing a commitment to the sale and is less likely to withdraw.

How Much Earnest Money Should You Put Down?

The amount of earnest money put down by the buyer is negotiable and can vary depending on the location, type of property, and market conditions. Typically, the amount is between 1% to 5% of the purchase price of the property. The larger the deposit, the more committed the buyer appears to be to the seller.

What Happens to the Earnest Money After the Sale?

Once the sale is completed, the earnest money is applied to the purchase price of the property. If the sale falls through due to a breach of contract, the seller may be entitled to keep the earnest money as damages. If the sale falls through for other reasons, such as the buyer’s inability to obtain financing, the earnest money may be returned to the buyer.

What Happens if the Buyer Backs Out of the Contract?

If the buyer backs out of the contract without a valid reason, the seller may be entitled to keep the earnest money as damages. However, if the buyer backs out due to a contingence outlined in the contract, such as not being able to obtain financing or an inspection revealing major repairs needed, the earnest money would be returned to the buyer.

Conclusion

Earnest money is an important aspect of a real estate transaction that shows the seller the buyer’s commitment to purchasing the property. While the amount of earnest money put down is negotiable, it is typically between 1% to 5% of the purchase price. If the sale is completed, the earnest money is applied to the purchase price of the property. If the sale falls through, the fate of the earnest money will depend on the circumstances surrounding the breach of contract. As a buyer or seller, it is important to understand the role earnest money plays in the transaction and to ensure that the contract outlines its use and contingencies.