BUYERS' AGENTS: How much earnest money do you recommend that your buyer make when writing an offer?
That question is not as simple as it would seem. The dynamics of making and offer and achieving a ratified Contract of Sale are far more complicated than many would think.
This morning I reblogged a post by Hella Rothwell, Choose the buyer and his agent for your short sale very carefully. Hella suggested several suggestions for agents/buyers writing offers on short sale listings. I reblogged Hella's post and added a suggestions that the earnest money be deposited when the contract is ratified AND that the amount of the EM NOT be "walking away money" and that it be deposited right away. HA! Notice the ActiveRain synergy in these posts?? From Hella to me to Jay and back to me, then back to Hella.
Jay Markanich commented about "walking away money" and asked if the amount has changed over the years. I commented back that his comment was a great subject for a blog post. So, here we go.
QUESTION: HOW MUCH TO OFFER FOR EARNEST MONEY?
And the ANSWER is . . . . . IT DEPENDS.
PRICE RANGE: How much earnest money may depend on the price range of the property for sale. In my experience for Maryland and Northern Virginia sales, If an offer is in the price range of up to $200,000, an EM of $1,000 is generally acceptable to the seller.
For homes in the $200,000 to $500,000 range, an EM of $2,500 to $5,000 is generally acceptable.
For homes in the $500,000 to $1,000,000, an EM of $10,000 is generally acceptable. As you get closer to the $1,000,000 range, an EM of $25,000 is not unusual. When I sold my home in Bethesda, the buyer's offer included a $25,000 EM. My broker recommended a higher EM of $40,000 for a $700,000 purchase price. The buyer accepted.
On a $5,000,000 sale, we negotiated a $250,000 EM. HA! That was too high for my Escrow account ($200,000 F.D.I.C.) so the money was held by the title company.
SHOWING STRENGTH. Strategy will plan a strong role in determining EM amounts. When a buyer is making an offer and wants to show a very strong financial position, a higher EM is in their favor especially if there are competing offers. I'm a very strong proponent of showing strength in offers. We have had contracts accepted over higher priced offers because our EM and lender's letter show a buyer with financial strength.
TYPE OF LOAN. This has gotten far more complicated with the plethora of First Time Home Buyer programs. Buyers who would normally need down payment and some, if not all, of their closing costs may now be able to buy with little to no cash out of pocket. FHLGrant, USDA, VHDA (Virginia), CDA (Maryland), portfolio loans, etc., may eliminate or greatly reduce the amount of cash a buyer will need to buy. Of course, the Veterans Administration home loan program has always permitted the VA home loan eligible buyer to buy a home with no money out of pocket.
EARNEST MONEY, however, is a completely different matter. Earnest money protects the home seller. So, we have two forces at work.
If the home buyer is NOT going to need much, if any, cash to close, does it make sense to have high EM?
Why would a buyer "walk away"? There are many reasons why a buyer may change their mind and want to "cancel" their contract. **
Found a better house to buy.
Got cold feet.
Had other places they want to spend money.
Fact: A buyer cannot just "change their mind" and cancel a contract. That would be considered a "default" and, unless the seller agreed to release their EM, the buyer would and should forfeit the EM to the seller. I'm a strong advocate for buyer's agency. However, when a buyer and seller have a ratified contract the seller takes their property off the market, If the buyer then "WALKS", the seller has been harmed by lost opportunity to sell while the property was under contract and off the market. Hence: "Walking Away Money".
** In case of a medical emergency, job transfer, loss of income, etc, the buyer would probably not qualify for financing and would be able to cancel the contract and receive a full refund of the EM with a property release.
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