Thursday, August 20, 2015 / by Deborah Argenta
The Role of Earnest Money in Your Real Estate Transaction
Whether you're buying or selling a home here in the Indianapolis Area, you need to understand the role of earnest money in your transaction.
The stated function of an earnest money deposit is that it is a good faith gesture to show that the buyer is serious about making the purchase. With that in mind, many believe that the larger the dollar amount, the more likely that buyer's offer will be accepted.
Quite often that's true, because a buyer who changes his or her mind without cause could very well lose that money.
"Without cause" is the operative phrase here, because many offers are filled with contingencies that give a buyer a "free out."
Some contingencies are quite legitimate. For instance, the house must have clear title and the person selling must be the person who has the right to transfer that title. Other valid contingencies center around the condition of the home and property as reported after inspections. One might be that the seller make up to a set amount in repairs, should they be necessary.
Other contingencies should make a seller use caution. For instance:
- A contingency based on approval from another party. This should be a huge red flag – unless the buyer has indicated only a matter of hours for that contingency to be removed.
- A contingency based on receiving a settlement of some kind. Very often these buyers are dreaming of a settlement that may or may not be forthcoming. If you want to accept an offer with this contingency, have your agent check into it to make sure it's really happening – and when.
- A contingency based on the sale of another home. Unless the other home is already under contract with a closing date coming soon, this is another one to avoid.
Contingencies based on loan approval are common – and a good reason why most sellers today ask to see the buyer's written loan pre-approval before taking a house off the market. (Don't confuse loan pre-approval with pre-qualification, which is merely a loan officer's opinion based on verbal information from the buyer.)
How much earnest money should a buyer deposit?
Customs vary from place to place, so in some communities it could be as little as $100. However, the rule of thumb in most areas is 1% to 2% of the offered price. Here in (city) the average earnest money deposit is about $1,000.
What happens to the earnest money?
It is held in a trust account to be applied to the buyer's closing costs or down payment. This money is carefully accounted for and may never be co-mingled with the agent's, broker's, or title company's own funds.
It may be deposited immediately or held in the transaction file until the offer has been accepted by all parties. Here in Indiana,earnest money is deposited upon the acceptance of the Purchase Agreement.
What happens if there's a dispute?
When a buyer wants earnest money returned and the seller wants to keep it, the courts make the final decision. The agents, brokers, and title companies involved never make this decision, and in fact never return earnest money until the seller signs off in agreement.
When making an offer, be reasonable in your demands. Discuss the contingencies with your agent and ask only for those that are important.
When considering an offer, read it carefully so you KNOW what each of the contingencies means to you. Take time to go over the entire offer with your agent – don't just focus on the selling price and date.
When you work with me, I'll be happy to take as much time as necessary to go over every line of your agreement - so there will be no surprises later.
So - when you're ready to buy or sell, get in touch!
