Is a What is Earnest Money?

How Much Earnest Money Do I Need? a Wise Choice?

Earnest money is money buyers present as part of their purchase offer to the seller.  It is a good faith deposit that, effectively, expresses the degree of seriousness of a buyer’s intent to perform on the terms and conditions contained within the purchase offer. 

Earnest money is not to be confused with a down payment.  They are two distinct items.  Earnest money is paid at the time buyers sign a purchase offer.  A down payment is money a buyer presents at the time of closing.  However, an earnest money deposit will be credited toward the down payment at the time of closing.

How much earnest money do I need?

Everything in a purchase contract for real estate is negotiable.  The amount of earnest money is variable, depending upon circumstances.  For example, if a property had more than one offer being presented to the seller for consideration, a buyer may wish to increase the amount of earnest money to demonstrate the depth of seriousness of the offer.

Listing agents represent the seller and prefer higher amounts of earnest money to “bind” the buyer to the contract.  Buyer agents, at times, counsel buyers to limit their earnest money deposit.  When the appropriate time comes, discuss the appropriate amount of earnest money with your real estate professional.  The answer to the question will depend upon transactional, market and personal circumstances.

What happens to the earnest money check once an offer is made?

Once the purchase offer has been accepted by the seller, in most cases, the earnest money deposit check will be deposited into a non-interest-bearing escrow account.  This money is customarily held by the listing broker and, as mentioned earlier, credited as part of the down payment at the time of closing.

The process can be different for a buyer who is interested in purchasing a newly constructed or custom-built home.  Often, the builder will require a 10% to 20% down payment.  That money is used as working capital to commence construction of the home.  The builder will put up a performance bond for the down payment money given to them by the buyer. 

Can you lose your earnest money deposit?

The purchase and sale contract used in the Capital Region of New York State has clear language describing how earnest money will be handled.  If a dispute arises, the contract contains provisions which prescribe a course of action in the event of contract default or a dispute arising from contract contingencies. 

If one party to the purchase contract wishes to cancel the contract, a Cancellation and Release form can be used to mutually release the parties from the terms and conditions of the purchase contract. 

Alternatively, an escrow release form may be signed by the parties, detailing who receives the earnest money, how much of the earnest money is released and, when the earnest money is to be released.  The earnest money release form states all other terms and conditions are to remain in full force and effect.  This form is not to be confused with a general Cancellation and Release form. 

The ramifications of signing either form should be discussed with an experienced and qualified real estate professional or a competent real estate attorney.

If the parties are unwilling to come to agreement, a legal process can be initiated.  However, this doesn’t occur too often. 

Summary:  Earnest money is an important component to consider when constructing a purchase offer.  Specific negotiating strategy should be discussed with an experienced full-time real estate professional. 

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