Earnest Money - what, why, how much?

By
Real Estate Technology with Zillow

Author's Note: This post was originally published on Active Rain on June 25, 2006 and was recognized by Bob Stewart and other AR founders as the first real blog post on Active Rain. In an act governed primarily by emotion, I deleted it, and all my other AR posts on July 7, 2010. Sometimes I regret that move. Sometimes not. However, Bob personally asked me to restore this post for its "historical interest". And Bob's a great guy. So, here it is...

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Earnest Money – whenever we’re writing up an offer for a buyer, invariably the one thing that generates the most questions is earnest money. What is it, why do I need it, how much, will I lose it – these questions almost always require a lot of discussion and education.

What is earnest money and why do I need it? The “book definition” of earnest money is: “A deposit paid by a buyer to a seller to demonstrate intention to complete the purchase.”

That pretty much sums it up. In Arizona real estate, earnest money is some amount of money, deposited in escrow, which helps show the seller that a buyer is serious. Normally the earnest money is applied to the buyer’s down payment at close of escrow.

Without earnest money, and the possibility of losing it, there is nothing to stop a buyer from submitting offers on multiple properties. Without earnest money, there is nothing to stop a buyer from just walking away from a contract days or weeks after it’s been accepted and the seller has taken their home off the market. Sellers want and need to know that a buyer is serious about the offer on their property.

How much earnest money do I need? The simple answer is, “the more the better”. The complicated answer (and one that’s virtually impossible to know in advance) is, “whatever it takes to make the seller know you are serious”. **Generally** speaking, 1% of the offer price is considered a reasonable amount. But like anything in real estate, there are no hard and fast rules. I’ve seen offers written with as little as $1 earnest money and as much as 100% of the sales price.

An example may be helpful here. Let’s say a seller gets two offers. They are identical in price, down payment amount, close of escrow date, etc. But offer #1 has a higher earnest money deposit than offer #2. Regardless of the true motivation of the buyers, the seller will most likely accept the offer with the higher earnest money amount. A significantly higher earnest money amount may even make a seller consider one offer over another even is there is difference is terms such as price, close of escrow, etc. Higher earnest money amounts signify to sellers that a buyer is serious and more likely to close the transaction.

Can I lose my earnest money? The short answer is yes. The complete answer is maybe. Again, generally speaking, your earnest money is “safe” unless you default on the contract. Should the seller default, your earnest money will be returned. In Arizona, the typical “inspection period” (or “due diligence” period) is 10 days. If the property you make an offer on doesn’t “pass” inspection, or if the seller declines to do requested repairs, the buyer can cancel the contract and get their earnest money back. There are also contingencies in the standard residential resale contract that a home must appraise for the asking price and the buyer must be able to secure financing. If neither of these contingencies are met, then generally earnest money is returned to the buyer.

Most earnest money is lost when the buyer backs out after the inspection period. In this case, the seller will almost always retain the buyer’s earnest money.

There’s nothing to be afraid of with earnest money. If you are serious about purchasing a home, you need to indicate to the seller you are serious. They’ll be taking what is probably their single largest asset off the market if they accept your offer. They need to know you are serious about completing the sale. That’s why a seller wants to see that you can get a loan, that you aren’t “fishing” with multiple offers, and that you aren’t going to back out at the last minute. A reasonable earnest money deposit helps reassure the seller you are serious about buying their home.

Comments (20)

Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

JAy - well the information is as relevant, I think, now as it was 4+ years ago. Obviously local practices and protocol impact the deposit that buyers offer. WHen I was in MA the "norm
 was 5 - 10%.

Jeff

Jan 05, 2011 12:42 PM
Elizabeth Cooper-Golden
Huntsville Alabama Real Estate, (@ Homes Realty Group) - Huntsville, AL
Huntsville AL MLS

Jay, Welcome back!  You are definitely the front runner and now have made a nationwide name for yourself.  Pretty amazing, isn't it?  I hope I get to meet you again and actually have time to "chew the fat" a bit ;)

Jan 05, 2011 03:28 PM
Fred Carver Personal Real Estate Corporation
RE/MAX Camosun Victoria BC Real Estate - Victoria, BC
Accredited Real Estate Consultant

Hi Jay..I agree with Bob, it was rthe first real Blog Posts in the Rain, I even tried Copying and pasting only to get slapped in 06, oh well, we'll all still above the ground and blogging.

Welcome back, hope you'll stay a while.

HAVE YOUR BEST YEAR EVER IN 2011!

Jan 06, 2011 12:45 PM
Justin Dibbs
Pearson Smith Realty - Ashburn, VA
REALTOR® - Ashburn Virginia Homes for Sale

I started reading this and then got wrapped up in the linked post over on TPREG.  

Jan 07, 2011 01:26 PM
Dan Rochon
Greetings Virginia - Keller Williams Realty - Alexandria, VA
Top Realtor in Northern Virginia

I wanted to be able to say that I commented on the first "real" blog on AR.  Now I have a story for my kids and grand kids :)  

PS:  Jay, Keep up the great work in whatever format that you choose.  Your Phoenix Real Estate Guy is a great blog!!  I appreciate you.

Jan 08, 2011 05:23 PM
1~Judi Barrett
Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745 - Idabel, OK
BS Ed, Integrity Real Estate Services -IDABEL OK

Jay,

I wasn't here in June of 06, came in December so missed this post.  After reading why it's been re-posted, glad that you did. 

I'm off to visit your other blog.

Hope you'll start posting here again.

 

Jan 18, 2011 12:30 PM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

A moment from Active Rain history - the first "real" blog post ever on Active Rain from The Phoenix Real Estate Guy - Jay Thompson.  Hopefully there will be more to come!

Jan 19, 2011 12:38 AM
Don MacLean
New England Real Estate Center Inc. - Easton, MA
Realtor-Homes for Sale- Easton, Mass 02356

Great first blog,

Taking the questions out of the questions.

Simple and informative

Enjoy the day

Jan 19, 2011 01:06 AM
Jeremy Blanton
Myrtle Beach Homes Blog - Myrtle Beach, SC
Myrtle Beach REALTOR®- myrtlebeachhomesblog.com

Nice Post Jay, Now can someone give me my 25 points for this comment? :)

Feb 11, 2011 07:13 AM
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

I wish you'd restore all of your writings out of my sheer desire to read them. 

Feb 15, 2011 11:33 PM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Thanks for the repost Jay and it is nice to see you back and around Active Rain.

Mar 02, 2011 05:10 AM
David Shamansky
US Mortgages - David Shamansky - Highlands Ranch, CO
Creative, Aggressive & 560 FICO - OK, Colorado Mtg

Wow this was really the first official blog post on AR?

If so it has to be saved! Hopefully they archive if not it would be a shame to lose them.

Thanks for the revival

Dec 07, 2011 02:23 PM
Doug Bullwinkel
Envoy Mortgage,NMLS ID 6666 - Sacramento, CA
Mortgage Loan Originator NMLS #281609

It's great to be a part of the first official AR blog.  The earnest money will definitely make a statement on how serious the buyer is.  The bigger the better.

Dec 07, 2011 03:26 PM
Kasey & John Boles
Jon Gosche Real Estate, LLC - BoiseMeridianRealEstate.com - Boise, ID
Boise & Meridian, ID Ada/Canyon/Gem/Boise Counties

Wow, the first real blog on active rain?  I'm interested in why you deleted it...great that you brought it back. -Kasey

Dec 07, 2011 05:33 PM
Anita Clark
Coldwell Banker Access Realty ~ 478.960.8055 - Warner Robins, GA
Realtor - Homes for Sale in Warner Robins GA

WOW...can't believe I stumbled across this post.  Congrats on being credited with the first blog post Jay!  Six years later and AR is still going strong.

Aug 13, 2012 08:28 AM
Rich Jacobson
Fathom Realty West Sound - Poulsbo, WA
Your Kitsap County WA Real Estate Broker

gosh, you've come a long way since then!....gotta admit, AR was quite the launching pad for many of us, or at least a breeding ground for future talent!...

Dec 10, 2012 03:29 PM
Margaret Rome Baltimore 410-530-2400
HomeRome Realty 410-530-2400 - Pikesville, MD
Sell Your Home With Margaret Rome

This is real AR history. Thanks for bringing it back!

Apr 08, 2015 05:06 AM
Alan May
Jameson Sotheby's International Realty - Evanston, IL
A moving experience!

this was your first post??  Really?!  It's like a real grown-up.. truly professional.  I think my first post said: "hey ya'll... this is my, duh, first post".

Apr 08, 2015 05:35 AM
Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

This is a very good post - my first was several grades above Alan May's post, but not this thorough.

Apr 09, 2015 12:05 AM
Alan May
Jameson Sotheby's International Realty - Evanston, IL
A moving experience!

Everyone's first post was better than Alan May's.  It would be difficult for them not to be.

Apr 09, 2015 12:20 AM