Whenever we’re writing up an offer for a buyer, invariably the one thing that generates the most questions is earnest money. What is it, why do I need it, how much, will I lose it – these questions almost always require a lot of discussion and education.
What is earnest money and why do I need it? The “book definition” of earnest money is: “A deposit paid by a buyer to a seller to demonstrate intention to complete the purchase.”
That pretty much sums it up. In Arizona real estate, earnest money is some amount of money, deposited in escrow, which helps show the seller that a buyer is serious. Normally, this deposit is applied to the buyer’s down payment / closing costs at close of escrow.
Without earnest money, and the possibility of losing it, there is nothing to stop a buyer from submitting offers on multiple properties. Without earnest money, there is nothing to stop a buyer from just walking away from a contract days or weeks after it’s been accepted and the seller has taken their home off the market. Sellers want and need to know that a buyer is serious about the offer on their property.
How much do I need? The simple answer is often, “the more the better”. The complicated answer (and one that’s virtually impossible to know in advance) is, “whatever it takes to make the seller know you are serious”. **Generally** speaking, 1% of the offer price is considered a reasonable amount. But like anything in real estate, there are no hard and fast rules. I’ve seen offers written with as little as $1 and as much as 100% of the sales price.
An example may be helpful here. Let’s say a seller gets two offers. They are identical in price, down payment amount, close of escrow date, etc. But offer #1 has a higher earnest money deposit than offer #2. Regardless of the true motivation of the buyers, the seller will most likely accept the offer with the higher earnest money amount. A significantly higher earnest money amount may even make a seller consider one offer over another even is there is difference is terms such as price, close of escrow, etc. Higher earnest money amounts signify to sellers that a buyer is serious and more likely to close the transaction.
Can I lose my earnest money? The short answer is yes. The complete answer is maybe. Again, generally speaking, your earnest money is “safe” unless you default on the contract. Should the seller default, your earnest money will be returned. In Arizona, the typical “inspection period” (or “due diligence” period) is 10 days. If the property you make an offer on doesn’t “pass” inspection, or if the seller declines to do requested repairs, the buyer can cancel the contract and get their earnest money back. There are also contingencies in the standard residential resale contract that a home must appraise for the asking price and the buyer must be able to secure financing. If neither of these contingencies are met, then generally earnest money is returned to the buyer.
Most earnest money is lost if the buyer backs out after the inspection period. In this case, the seller will almost always retain the buyer’s earnest money.
There’s nothing to be afraid of with earnest money. If you are serious about purchasing a home, you need to indicate to the seller you are serious. They’ll be taking what is probably their single largest asset off the market if they accept your offer. They need to know you are serious about completing the sale. That’s why a seller wants to see that you can get a loan, that you aren’t “fishing” with multiple offers, and that you aren’t going to back out at the last minute. A reasonable deposit helps reassure the seller you are serious about buying their home.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Real estate business is all bout getting into risks with a big some of money at hands. And if you
are not interested in giving away a bit then it's not yer cup of tea.
Can someone help? I put down earnest money for a house not yet built.
The contract indicated I would be allowed to inspect the house before the walls were sealed. That didn't happen.
It also states the house is in not within the city limits of where I was told it was. Due to taxes
and that particular city's government, I don't want to live there. Do you have any recommendations on how I can
get my money back?
Cindy –
Without seeing your contract, it's very difficult to say. Does the contract have any provisions for WHAT can be done if the builder failed to meet their obligation (on the inspections)?
Did you use a real estate agent when you signed the contract (I'm talking an independent agent, not the builder's agent)? If so, call them! If you used the builder's agent they will likely be no help–though they *should* be willing to explain the contract to you. Even if they are employed by the builder, the have a responsibility to you. But let's face it, human nature says they won't be much help. This won't do you any good, but it should be said — ALWAYS use a buyer's agent on a new build! The builder pays the commission, a buyer's agent won't cost you anything.
There's a very good chance that somewhere in the contract is language similar to "buyer is responsible for verifying any items of material importance". So them saying it was in the city limits may mean nothing contractually. It may in fact, have been your responsibility to verify that if it was important to you. (And probably within a certian time period).
How much earnest money are we talking about? If you didn't use an independent agent, then your only choice may be to have a real estate attorney review your contract. What state is the home in?
Jay
I had an offer on my home and it was placed in title. We went through the appraisal (that I paid) termite inspections (that I paid) and went through to the closing date and didn't hear anything from the buyer. It is now a week later and nothing. I went to the tile company and asked for the earnest money and they are now saying that I have to cancel the transaction and ask for the money while giving the buyer 10 days to resond. I did my due diligence and the buyer never responed to phone calls. Is the buyer in breach of contract? This is a standard real estate contract in Arizona.
Ana –
I can't really get involved in an existing contract between two parties. Have you asked your agent about this? I'm thinking that since you approached the title company and it sounds like you called the buyer that perhaps you don't have an agent representing you?
There appear to be inconsistencies in some of what the title company is telling you. You would have to cancel the transaction and provide a "cure period" for the buyer to resolve, but the typical period for that is 3 days, not 10.
If you have an agent, I encourage you to talk to them immediately. Their job is to help you through this. Is the buyer's agent involved at all? They are also responsible for affecting this transaction.
my daughter applied to a bank for a house loan and she told them she had 2 months left to her bankruptsy and was told by a woman there that it didn't matter. She put down $1,ooo in ernest money and $450.00 for an appraisal. She is wondering who has a say over her money and shouldn't this have been put into escrow? She was given a May 18 closing so shouldn't all the investication already been made. She is heart broken and she hopes she will have her money returned.
i was told that i qualify for a loan and received a closing date i put down earnest money,then a day before my closing date i was told that i did not qualify. my question is do i get my money back?
Regia – I can't really get involved in an existing contract between two parties. Your agent should be able to help you. Also, the answer may vary by state. If you are in Arizona, and are using the standard Arizona residential resale purchase contract then you should be able to get your earnest money returned (provided no additional provisions were written into the contract).
But there is no way I can say for sure without reading your contract.
We gave an offer to a house and the offer was accepted. We put $5000 earnest money to it. The inspection report came out that the house has carpenter ants in all three levels and other defects. So with the help of the selling agent, we disprove of the defects. In the offer, we did say that the seller has the right to repair. But we feel that the defects are not insignificant, we don't want the house anymore. But the seller didn't sign the release form yet. I worried that we may lose our earnest money. Any advice is helpful and appreciated.
Jack – unfortunately, there is not much I can offer. Your contract (hopefully) has language that addresses inspections, repairs, your recourse and the disposition of earnest money. You need to address your concerns with your agent, or an attorney.
Earnest Money is a good faith deposit but not to be confused with a down payment. When buyers execute a purchase contract, the contract specifies how much money the buyer is initially putting up to secure the contract, to show "good faith," and how much money all together will be deposited as a down payment. The balance is generally financed as a mortgage or a combination of mortgages.
Regards, Shane, Guy into real estate in panama