Oscar Wilde's popular Victorian play has nothing to do with earnest funds but lends a fun intro to a very important topic when buying a home. To be earnest, you show eagerness, intent or seriousness. That definition alone should indicate the role of earnest money in a real estate transaction. Whether considering an 1890's Victorian farmhouse or a newly constructed split-level home, it is important to be earnest when deciding what the correct amount would be to give as earnest funds with the offer to purchase a home.
When buying a home, the words used can often be confusing. Home buyers want to be focused on the esthetics and mechanics of the property (the color of the exterior siding and age of the plumbing) while the structure of the offer is often left to their REALTOR®. So I am never surprised by the silence when I pose the question,"How much are you prepared to write the earnest money check for?"
Earnest money is different than a down payment. These are funds submitted with the offer to the sellers' real estate broker. In contrast, a down payment is paid at the time of closing to the bank or mortgage company. The amount of the earnest money is something that the buyer determines based on the property and on their motivation to secure a deal.
Simply put, earnest money is a term used for the funds that a buyer puts down to demonstrate to the seller their seriousness about buying a home. It should be an amount sufficient enough to indicate to the seller that the buyer will not walk away from the deal without good reason. In Minnesota, 1% of the purchase price is customary. But a buyer can offer more to show good faith to a seller and make their offer very enticing. Likewise, a seller can ask for a higher dollar value in their counteroffer if they feel the initial earnest amount was too low. A lower amount may be acceptable in some circumstances; however it is important to be realistic.
Only a couple of years ago, a potential buyer wanted to write up an offer on at an open house of a home I had on the market in Forest Lake. The newer splitlevel home was on acreage and set up with horse stables. It was priced in the $300,000 range. This "wheeling and dealing" buyer thought she was going to impress the sellers with a whopping $100 earnest money check. The seller was significantly less than impressed to say the least. They knew the deal would be on shaky ground as with this paltry amount, the buyer could easily walk away from the deal.
Generally the earnest money funds are in the form of a check. If the offer is accepted, the money will be deposited into the listing broker's trust or escrow account. In Minnesota, the funds must be deposited within 3 days of an offer having been accepted in writing. Yes, the check WILL be cashed in 3 days or less!
If the offer is accepted, the earnest money will be applied to the down payment and/or the closing fees when the closing takes place. If your offer is not accepted the check is not cashed and your original check will be returned to you.
However, if the offer is accepted and the check cashed and then for some reason all contingencies are not met or other situation arises where the sale does not proceed, the buyer does not automatically receive a refund of the earnest money. Nor, does the seller automatically keep the down payment. The funds are disbursed as outlined in the purchase agreement or in some cases; the Buyer and seller must reach an agreement for the cancellation of the agreement before the funds can be disbursed.
If you are buying, selling or relocating to Minnesota and need help from a professional REALTOR ®, give me a call or visit my website for FREE Relocation Packet or Homebuyers Success Packet. I specialize in acreage and lakeshore properties in the north and east Twin Cities metro area including Ham Lake, Lino Lakes and all communities in the Forest Lake School District! Serving Anoka, Chisago, Ramsey and Washington Counties in Minnesota.
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Copyright 2009 Teri Eckholm http://www.terieckholm.com/
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That's great info Teri! Some think this is a game and run around making offers just to see if they can get it accepted or whatever the case may be.