Let's hear som thoughts on how much is a fair amount to put up for "Earnest Money."  I explain to my buying clients that "earnest money" shows their interest or good faith in the property. Am I wrong!  Is there a rule of thumb for deciding what is an appropriate amount for earnest money?  Some I have spoke to say 1% of the asking price is a fair amount.  Some say it depends on what the Buyer can afford.  For my lower priced buyers I tell them that $500 is the "norm" in this price range of under $100,000. Most of them are comfortable with that and that's fine but what about when you get in the higher price ranges?  $200,000 and up!  It makes since to me it should be what the Buyers are comfortable with and can afford.  I've had buyers in the 6 figure range that are more than willing to plop down 1% for earnest money and then I've had some that ask "when will this check be deposited in the bank" That's scary!!!  Let me know what you think! 

 

15 Comments on Your Thoughts On Earnest Money!

JAN
24
2008
 I agree with you. It depends on what the customer can afford and is comfortable with.
10:14am • #1
386,162 Points 30 Featured Posts Outside Blog Hit Router Called Shot Master

In our area, it is not uncommon to see between 1-3% of the purchase price, depending on the property and how much interest there is likely to be in it. 

I'll be honest - if a buyer is worried about a check for a couple thousand dollars being deposited, I would be more worried about what happens to them when a dishwasher or a heat pump goes out and a serviceman needs to comes out.  Now that's scary.

10:15am • #2
269,968 Points 15 Featured Posts Localism Sponsor Outside Blog Called Shot Master
I've closed two condos in Chicago and heard their norm is 3-5%.  I think $500 under $100,000 is good and over that $1,000.  I don't like when the agents counter back and want more earnest money because it makes my buyers freak out:)
10:18am • #3
208,810 Points 25 Featured Posts

Kelly - The purpose of the earnest money deposit is not only to show the level of interest a buyer has in a property, it must also represent an amount at risk should the buyer fail to complete the transaction. The seller is removing the property from the market for a period of time and should feel that they are protected if that time frame was for nought.

Buyers that are concerned that the check will be deposited should concern you. I would find it scary if I represented a buyer that could not cover the deposit check. I have been in situations in which the buyer did not have sufficient funds available and chose to sign a promissary note for additional funds if they failed to complete the transaction within the time frame outlined in the contract.

In Maryland, the deposit truly is at risk. If a lender fails to fund a transaction within the timeframe designated in the contract, the buyer forfeits the earnest money with no recourse. Of course, this does not happen in the real world very often, because claiming the deposit requires the seller to release the buyer and then put the property back on the market. Agents generally attempt to work with buyers if there is an indication that the delay is temporary.
10:23am • #4
107,423 Points
I usually do $1000.  That is enough to cover the inspections.  If something goes wrong, I don't want to be arguing with the seller over a lot of money.  I know of a deal where the buyer put down $50,000.  The house was over $1,000,000.  There was a dispute over something.  It has been over a year.  The seller will not release the money.  My lawyer will call your lawyer.
10:24am • #5
Depends - if the buyer is going for a ( or can get a) 95-100% loan then obviously they have no funds to give and you go with what the seller will accept. If the money is there then 10% for the earnest money from a practical standpoint. In our contracts - if the deal should fall apart and a claim on the money should be made in favor of the seller then the earnest money is split 50/50 between seller and listing broker. -  or 5% to the broker who would have made that if the deal closed, assuming a listing commission close to that was agreed to by the seller in the beginning.
10:25am • #6
1,003,928 Points 4 Featured Posts Outside Blog

everyone feels very differently about this one.  I think $1,000 with the offer, and $5,000 on the second deposit after the inspection period is over, usually works well.  I also agree with you that if they can afford more, they should do it.  It makes their offer stonger to the seller.

Thanks

Don
10:29am • #7
There is no normal amount in my area. While it is nice to see a large earnest money check it shouldn't be the only consideration for excepting or rejecting an offer. If the buyer is strong and all the other terms of the contract are good I wouldn't let the earnest money keep me from encouraging the seller to accept the offer.
10:38am • #8

Wow.  My sister lives in Florida and I am constantly amazed at how different it is there from Ohio.  Here, earnest money can not  be legally released to either party without both parties agreeing who gets it, and the agents never have a claim against it.  When I teach new agents I complete a simple survey.  I ask them to indicate to me at what amount of earnest money deposit they would still buy a 200,000 home after they have changed their mind.  Understanding that conditions unmet, means the buyer gets the money back, usually, but failing to perform by choice is the only time the money is truely at risk.

 I rarely have anyone tell me that they would buy it anyway before we get to 7 or 8% of the purchase price.  It is my contention that earnest money does not make a buyer buy when they have changed their mind, sellers rarely get to keep it and it is a big hassle for the agents and our book keeping staff, so I don't collect any unless there are certain circumstances, like...... Immediate possession in an occupied home( we do round table closing), or a prolonged contract period like 90 days or longer.  In those cases, we make it non-refundable to the buyer for any reason.  It can only be credited back to them at closing for costs incured.  If we don't close, it is treated more like an option payment.

Ohio law calls for consideration, which is the cash or mortgage for the buyer and the property for the seller, so earnest money is not a requirement under Ohio law to make the deal binding.

 
10:43am • #9
237,041 Points 5 Featured Posts Called Shot Master
John says it well. In our area we also take into consideration the amount of money that can be recovered in Small Claims Court, which is up to $7500.00
10:45am • #10
What I have found in our market is $500 is common, $1000 for some of the higher priced homes.  Our average home sells in the $120,000 range so the $500 works fine.  I have not heard of any problems with sellers disagreeing with that amount. 
10:46am • #11

I agree with the other comments.  It depends on the property.  But, I also want to add that it also depends on the buyers motivation to purchase the property.  A low EMD on a $200,000 property makes me question their seriousness.   I try to get 1% on all houses under 250,000 and I usually succeed.  Most buyers understand they are going to have to pay something to get into a house, and they do receive the EMD back to apply toward closing costs and/or prepaids.  If a buyer wants to put down $500.00 then it either means to me that they are not very motivated, or they might not have enough money to take the house to closing. 

If I'm representing a seller and I get a low EMD offer then I would SUGGEST that they ask for an additional deposit.  It's easier for a buyer to walk away from $500.00 than from $2500. If the buyer can't do it, they just can't do it.  At least you would get a feel for their financial situation.

 
10:46am • #12
JAN
31
2008
567,292 Points 5 Featured Posts Outside Blog

Kelly.... Great Question... and lots of great answers.  I see many transactions in our area go without earnest money at all. We are in a Military community and to be honest some of them buying a home are J.O.B.  Just Over Broke.  They can afford the house payment based on the BAH Housing Allowance. Sellers here are accustome to paying the mojority if not all closing cost for the buyers. This is factored into the listing rice in may cases.

 I have seen cases of $1, $100, $250 or enen $500 earnest money. Here is how I see it... If they are not putting down a amount that makes a significant inpact of $1,000 or more...... Is there really a need ? Earnest money is good faith money....... someone is not as likely to walk away form $1,000 or more as they may say.... It's only $500... let them have it..... I have seen this many times.
11:28pm • #13
FEB
01
2008
1 Featured Post
Roland - You're right...Educating Buyers is very crucial to them understanding the concept of purchasing real estate!
8:23am • #14
AUG
10
2010
864,740 Points 20 Featured Posts Localism Sponsor Outside Blog Attended Rain Camp Called Shot Master

Earnest Money is defined as the $1,000 that the Buyer loses when in contract on one of our listings and they try to pull some "funny stuff"!
7:55pm • #15


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Kelly Shoemaker Realtor Broken Arrow, OK

Broken Arrow, OK

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