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What Everybody Should Know About Earnest Money Deposits - North Georgia Blue Ridge Mountains

It's important for buyers to understand "Earnest Money" deposit since payments made before closing may not be treated the same in all transactions. How the Earnest Money will be handled is usually spelled out in the purchase and sales contract. You (the buyer) should consult with an attorney if you do not understand the purpose or disposition of payment terms or any other terms in the contract.

Let's start with some basic questions and answers about Earnest Money payments:

What is Earnest Money?
It is good faith money that the buyer usually gives to the seller's agent or may give to the buyer's agent if the buyer is being represented by an agent (requires a Buyer's Agency Agreement).

Is earnest money required in order to have a valid contract?
No. Law does not require an earnest money deposit but most sellers will. If you agree to pay earnest money and you do not make the required payment, you (the buyer) will probably be in breach of the contract.

Note: "Earnest Money is NOT the consideration for the contract - the purchase price IS. The function of earnest money is simpy a good faith gesture whereby the seller has some funds to seek as liquidated damages if the buyer breaches the contract. A contract written without earnest money is perfectly OK and legal although most sellers would ask for earnest money in a counteroffer." Source: Copyrighted: Applied Measurement Professionals, Inc. Lenexa Kansas.

How much Earnest Money is required?
This amount can be negotiated. Usually, it will be a small percentage of the purchase price which may vary depending on market conditions, the price and type of property (vacant land, resale of a home, new construction) as well as other factors.

Where does the Earnest Money go before closing?
The purchase and sale agreement will govern where the earnest money will go. Also, an amount to be paid will be specified and when the payment will be made. It should state whether the money will be held in a trust account sometimes called escrow, who will hold the money, whether it will be credited against the purchase price at closing and what happens to the money in the event the transaction does not close.

Will my Earnest Money earn interest between contract and closing?
Typically not because most earnest money is held by real estate brokers in non-interest bearing trust accounts. In the event the earnest money is deposited in an interest bearing account, the buyer and seller must agree on who will receive the interest. Be sure this agreement is included in the purchase and sale agreement and may require assistance from an attorney.

Who can hold Earnest Money?
Basically, any entity agreeable to (the buyer) and the seller but usually, it will be held by a licensed real estate broker. Buyer beware if you allow a seller or builder to hold the earnest money. You risk not getting the money back should the transaction not close. Therefore, it is good practice to have the real estate broker or attorney hold the deposit since they are required by law to deposit the money in a trust account. This minimizes the risk of the monies being used improperly.

Is Earnest Money different from an option fee?
Yes. An option fee is a separate fee the buyer may elect to pay in a purchase and sale agreement to walk away from the transaction during a specified time. Earnest money may be refunded under certain circumstances; the option fee is non-refundable.

Is there a federal law that allows me to rescind my home loan and wouldn't that allow me to get back my Earnest Money?
There is a federal law that gives a buyer three days to cancel a home loan commitment but it does not give the buyer the right to cancel a purchase and sale agreement and get a refund of the earnest money. The buyer is obligated to the purchase as specified in the sales contract and is not related to your right to obtain the best loan possible.

Does the buyer get back the Earnest Money if the transaction does not close?
This depends on why the transaction did not close. A typical contract may contain contingencies which must be met in order for the contract to proceed. Some requirements may be:

the buyer makes a good faith effort to obtain financing
the buyer may need to sell his/her own property first
the seller may need to make certain repairs
the seller will need to provide good title

If the seller does not meet his obligations, then the buyer may be entitled to a refund. However, if the buyer breaches the contract, then the earnest money will be forfeited. Also, the party injured by the breach may seek additional damages by asking for "specific performance" where a court may intervene. Be sure to consult with an attorney to fully understand the consequences and remedies if the purchase does not close.

What if there is a dispute between the buyer and the seller on who is entitled to the Earnest Money?
The real estate broker will continue to hold the monies in a trust account until the dispute is resolved either in writing or until a court decides the matter. The broker is not allowed to pursue a claim for either party but may appear as a witness in court and make necessary documents available.

Donna Yates, Realtor with Mountain Investments of North Georgia in Blue Ridge will help you find "your mountain investment". Please visit Donna's website: www.move2northgeorgia.net for great mountain homes for sale, real estate tips and advice, news and happenings in the North Georgia Mountains.

Posted by Donna Yates, Georgia Realtor North Georgia Homes, Blue Ridge Mountain on 09/06/2007 01:40 PM

Comments (38)

homebuyers, earnest money, north georgia mountains, blue ridge, mountain investments, real estate, realtor, buyers agency agreement, localism

Originally posted at: North Georgia Blue Ridge Mountains Real Estate Blog, Donna Yates, Realtor: What Everybody Should Know About Earnest Money Deposits - North Georgia Blue Ridge Mountains

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38 Comments on What Everybody Should Know About Earnest Money Deposits - North Georgia Blue Ridge Mountains

SEP

2007

Great post, I think is very important to educate our clients, I usually make 3% standard for the deposit.

Donna, Thank you for the information, I had never heard the term before and I'm willing to bet many other homeowners/potential buyers haven't either. I learn a little more every day.

Carole: I'm encouraged that if you haven't heard of it then others haven't either and maybe this will be helpful to those people, especially first time homebuyers. Thank you for your comment.

SEP

2007

Hey Donna - Great information on an item that always raises questions. Well put together.

Hi Donna,

This is a great summary for 1st time homebuyers that really don't understand how Earnest Money works. I like the little $$ guy at the bottom too!

Hi Donna, Good post. Education for buyers needs to be a top priority especially in todays market with loan programs shifting and such.

Keith: Thank you for your comment. I hope this post will help some first time homebuyers but even I have run across some seasoned buyers who didn't understand the concept of earnest money. They hadn't bought a house in years and wasn't too sure about how things work now. I've also found that some folks think they are actually going to get their earnest money back at closing and don't realize that it is generally a credit on their closing statement.

Tracy: Thank you for your comment. I liked the little money guy to and couldn't resist putting him somewhere in the blog. I've even had some seasoned buyers not know how earnest money works as I mentioned to Keith, which inspired this post.

Tom: I appreciate your feedback very much.

Great post Donna. I'm tagging this! We need to educated buyers, and this is well articulated

Diane: Thank you for your comment. I appreciate you tagging this one.

Great post. Good faith, honest money.... it all is a part of the contract and should be understood of why and how it works. I had a buyer make out the check to Escrow Holder and title had a question if the bank would cash the check. So its important to let them know who to make that check out to and to always put information about the escrow # or property address on the check - paper trail.

Again, good post.

Rosemary: Thank you for your comment. You make a very good point about the buyer knowing who to make the check out to. I have a buyer's booklet that I give out and I am going to go back and include a note about that.

SEP

2007

Donna do you have any details on the widlife arts fest in Blue Ridge?

SEP

2007

Keith: What information do you need in particular and I'll be happy to check it out for you? I am guessing you saw my blog on that festival which is why you are asking but since your comment is on a different blog, I don't know for sure if you actually have seen my blog on the wildlife festival. Thanks for asking.

Good post. Education for our clients is the best thing we can give that the "Internet Agents" cannot.

One question... How much Earnest money is normal for your market????

I usually look for a MIN of 1% (average sale in our market is about 300k). I just had someone offer 1K for a 260k listing - we of course asked for more as part of our counter....

SEP

2007

Very informative post on earnest money Donna! Our broker does not hold earnest money so we always let the buyer agent's broker hold the money or agree with having the sellers Title Company hold the "promise money."

James: Thank you for your comment and the info about the amount that is typical in your market. I generally see as low as $500 and not more than $1k unless the property is $1m and up then the earnest money goes up considerably. I've yet to have a seller counter back wanting more money.

Janis, Marty and Mike: Whoever brings in the buyer is typically the agency that will hold the earnest money in my market. Some brokers prefer that the agency for the seller hold the money but in Georgia, it's ok for either broker to hold the money. I appreciate you taking the time to stop by and leaving a comment.

We see alot of offers with $1000 earnest money. Sometimes we get an agent asking for $5000! That's another one of my pet peeves especially when I have first time home buyers that really don't have a whole lot of money to mess with. I try to explain in those situations that I would not allow my clients to lose their earnest money by defaulting on terms of the contract such as inspection period, loan approval date, etc.....

When I bought my 2nd home in Florida - I told the agent I could do 3k in earnest money (a 200k property) and the agent gasp! I was worried that wasn't enough! Seems $500 was just fine.

$500 earnest deposit in DC would get you the joke of the day award in the office!

great post. now featured on the First Time Homebuyer Group. Keep up the good writing!

Janis, Marty, Mike: My market is mostly second homes so I didn't think about First Time Buyers but you are so right. I remember when I bought my first home, we thought the earnest money was going to break us.

James: Even I snickered when I saw that you are in DC. I thought, $500 down in your market - Not. LOL

Ken: I appreciate the feature and appreciate more that you stopped by and left a comment.

Hello, Donna! Very informative post about Earnest Money. Interestingly some agents think that it's mandatory to have it to make an offer. Many consumers will benefit from this post, have you considered posting your instructive posts to localism.com? If you need help, please let me know.

SEP

2007

Hi Yolanda: Thank you for stopping by and leaving a comment. This post, to my knowledge is posted to Localisim but if you know something different, please let me know. I select localism as one of the groups to post to so I think that's how it's done. Your help is always, always appreciated. Hope things are well for you. You are so right about how many agents think earnest money is a requirement. Thanks again.

SEP

2007

Donna,

Very Good Tutorial on Earnest Money Deposits, definitely one to bookmark! It's an important subject that we dont always think about when we are with buyers or writing an offer!

SEP

2007

Debbie: Thank you for your comment. I wrote this post because I've experienced confusion among some of my buyers and these are seasoned buyers but haven't purchased a home in years so I figured if they are having trouble, then there must be many others too.

NOV

2007

Thank you for writing this article. It was very useful to me as a Georgia transplant. In my home state, earnest money gets applied to the down payment. When I heard it would not be so here, I misunderstood my agent and thought it would go to loan principal, which would impact our loan terms negatively. I already own (small potatoes) investment property in a third state and STILL did not know. Thanks for clearing this up!

DEC

2007

Marianne: I am very happy to know that this has been helpful. I hoped when I wrote it that it would be helfpul information to consumers and Realtors alike. I realized in my past year in real estate that there seemed to be some confusion when it came to earnest money and so that was my inspiration. Thank you for your comment.

FEB

2008

I made an offer on a house without paying earnest money. The seller accepted the offer and the sale closed. Seven months later, the title company calculated earnest money in the sale and now feels that I owe them for their mistake. The seller accepted the offer and even gave money (check) for $500 for repairs.

Why should I owe the title company for their mistake?

Sam: Thank you for your comment and I've never heard of your situation before. My suggestion to you is to consult with your closing attorney and the Realtor who represented you if you in fact had a Buyer's Agency Agreement with a Realtor. I am going to send your comment to a title inspector and see if he has any response to your comment. If he does, I will post it here with his permission.

Sam: Here is a response from Fran Gaspari, Title Examiner with Fran's permission, in regards to your comment:

Fran 'The Title Man' Gaspari TitleInsurer-PA&NJ Patriot Land Transfer

I assume Sam was given credit for earnest money that never found its way into the transaction...either at closing or as a credit on the HUD-1 that shouldn't have been...your response in your post was very forthright and adequate...I would suggest that Sam engage in a dialogue with the title company and let them explain how the error occurred...In the final analysis it shouldn't 'cost' Sam anymore than he should have expected to pay for the property had there been no error made by the title company!

...In reality that problem should have surfaced much sooner than 7 months after closing...We wouldn't have closed on the spot because we would not have balanced at closing...

Thank you Fran for being a great resource and responding to Sam's comment.

Hello Donna - Thank you for the information on EMD's

Michael: I hope it was of some help. What prompted me to write this post is when I realized there were a lot of consumers who did not know earnest money is not a requirement. Thank you for your comment.

FEB

2008

Donna,

Great post and very informative for all those with questions or concerns about earnest money.

MAR

2008

The Front Porch View - Thank you for your comment.

MAR

2008

Very informative and empowering. I just stumbled on your blog in search of information on this subject.

Blessings,

Amos: I am so glad you found this blog and I hope it was helpful to you. Should have any other real estate questions, please give me a call or send an email. I will be happy to help you find the answers you need. Thank you for your comment.

SEP

Hey Donna,

thanks for clearing up the matter as to is earnest money required to make an offer on a home. I have made offers with no earnest money and was countered back, it all worked out and the house sold.

Thanks

Mike

SEP

Mike: Thanks for digging up this old post. I thought it was a good one and hated to see it get buried along the way. In my state, you do not have to offer earnest money but you can almost bet on the seller countering for that or rejecting the offer altogether. I'm glad you found this post helpful and I appreciate your comment.

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