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Principles of Earnest Money Requirements

By
Real Estate Agent with Keller Williams Elite RM423455

I wanted to poll my Active Rain friends for some ideas which are percolating in my mind regarding earnest money deposits. In order to protect sellers, do you have certain requirements regarding the amount of earnest money you would advise your sellers to require with the signing of an agreement of sale?

I know. It depends.

It depends on the financing situation. But even in an FHA deal, the buyer needs to prove 3.5% of purchase price, so I am beginning to ask for at least 2% of purchase price for the earnest money deposit. What if it is a cash deal? What would you expect?

I also know the variables of how sweet the rest of the deal is. Settlement day, price, inspections and the motivation level of the seller. But even with these factors, requiring the buyer to place a sizeable earnest money deposit seems like a basic and important point of negotiations between buyer and seller.

What thoughts do you have regarding this matter?

Posted by

 

 

Living in Lancaster Group

 

An agent who places your interests as his first priority. 
Cal Yoder

Your Homes for Sale in Lancaster Agent

Keller Williams Realty Lancaster

1630 Manheim Pike

Lancaster, PA 17601

Office Phone: 717-735-1145

Cell Phone: 717-413-0744

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Nor Yeretsian
Envoy Capitol Realty Inc. - Toronto, ON
Envoy Capitol Realty Inc., Brokerage Toronto

Good faith money, the deposit providing the Seller with a Confidence that the Buyer will show up on Closing. It's also a nice qualifier, the more deposit the more they may qualify and the more confidence the Seller will have that this deal is going to get closed.

In our market, 5-10% + ( central Toronto) is about right. We even have some realtors putting the amount required with the offer on the MLS listing $100,000 -$250,000 , so that there is no confusion.

The best one I heard was a buyer put in an offer with up to 90% of the asking price and to close the deal within 60 days. It was a multiple bid situation and they won it at the full asking price.

Every market is different, however protect your client - get a good deposit.

cheers

Nor

May 23, 2011 01:21 PM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Cal, for our buyers, we recommend at least a total of 20% to show solid good faith on the buyers side.  When representing the sellers, we would like to see this also and will counter unless there are some special circumstances.

May 24, 2011 01:47 AM
Cal Yoder
Keller Williams Elite - Lititz, PA
Homes For Sale in Lancaster PA - 717.413.0744

Nor, I know. If the seller is taking the property off the market, there needs to be a substantial commitment made by the buyer.

Gabe, wow, 20%. You are definitely dealing with a different clientele than I am and probably not selling much FHA. But I understand what you are saying. Thanks.

Cal

May 24, 2011 02:51 AM
Tim Peterson
Wisconsin Realtor Safety and Concealed Carry Classes - Madison, WI
Realtor Safety Training Classes

Hi Gabe-when I bought my personal condo last year I gave an earnest check of 100% of the asking price-

May 24, 2011 10:22 PM
Tim Peterson
Wisconsin Realtor Safety and Concealed Carry Classes - Madison, WI
Realtor Safety Training Classes

Sorry-Cal-I was reading Gabes post at the same time as typing my comments-got to go to bed-thanks

May 24, 2011 10:23 PM
Cal Yoder
Keller Williams Elite - Lititz, PA
Homes For Sale in Lancaster PA - 717.413.0744

No problem, but I like a 100% earnest check with the contract. That is serious.

Cal

May 25, 2011 03:34 AM
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

Wow... it's quite customary in this area for $500 to $5,000.  rarely more.  And I generally shoot for 1% if I am making a recomendation. 

May 25, 2011 04:27 PM
Cal Yoder
Keller Williams Elite - Lititz, PA
Homes For Sale in Lancaster PA - 717.413.0744

Tammy, that is more normal here as well. But I have been rethinking it. We have the majority of buyers using FHA financing. This precludes the larger deposit, but I have begun to move beyond the $500 deposit. Thanks for sharing.

May 25, 2011 10:43 PM
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

It seems 1% is the current norm for FHA financing.  On cash deals I like to see more along with proof of funds.  The bottom line is if you end up in an EMD disptute the amount of money is irrelevant if the deal has gone south.  The squabble over the money will take up more time & potential legal fees that what the original amount was in most cases. 

May 26, 2011 03:44 AM
Andrew Mooers | 207.532.6573
MOOERS REALTY - Houlton, ME
Northern Maine Real Estate-Aroostook County Broker

Bigger the better and the quicker the closing date, less contingencies the sweeter. The longer anything drags out, life happens. Derailments show up. If the deal is going south, find out early on so you can back up, swerve around the stalled dead sale and open it up with the return to marketing full throttle on the open Internet highway. The deposit is less important than is the sale destine to close or not. The bigger deposits are something legal beagles to fight over and hold you and the seller hostage on. Give them back the $500 and move on. Fighting over the $2000 deposit with lawyers and their poison pen letters just delays the sale and saps energy you should be using chasing new buyers. Not playing Dr Phil and tip toeing around emotional buyer and seller in a dead deal where they both end up hating you when you want a higher authority to tell you what the heck to do with the deposit when both sides are threatening suit if you don't give it to either party alone. 

May 28, 2011 03:40 AM
Cal Yoder
Keller Williams Elite - Lititz, PA
Homes For Sale in Lancaster PA - 717.413.0744

Andy,

I agree with you. Having folks fighting when we should be marketing is so true. The specific situation I was working with has been resolved. The buyer was going to be using $100,000 cash and getting a small mortgage. Contigent upon inspections and looking very strong. The big kicker was the buyer needs to settle quickly. My seller needed to drastically rearrange her life over the next month. The original offer included $500 earnest money. I could not see my seller making these drastic changes and the eve of settlement the buyer saying, "See you later." What is $500 to walk away from. Notta. We were able to get them to put down $3000 and to come closer to our price. I believe it will work out well.

Cal

May 28, 2011 05:18 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Well it seems like EMD here is taken a bit lightly and there are too many ways for a buyer to weasel their way out of a contract these days!  To me, I guess it doesn't matter, you could put 100% down and still get out of a contract.

May 31, 2011 07:20 AM
Joni Bailey
101 Main St. Realty - Huntsville, TX
Your Huntsville / Lake Livingston Area REALTOR®
In Texas we have an option fee as well as Earnest Monry. Before this, eM was the big deal! Now, they can opt out for no reason with an option fee... So sellers seem to be requiring more money for that option. iF the buyer gets it back... It is only done at closing!
Jun 02, 2011 10:24 AM