What is an Earnest Money Deposit and How much should it be?

Buyers often ask this question and also wonder not only how much it should be; but how this affects the down-payment.

Earnest Money is a Deposit you put down on a property to show consideration (required in some states to make a contract valid).  It has nothing to do with the Down-payment (although it could go towards your down-payment).  

The Earnest Money is to show the sellers that you are serious about buying their property.  By accepting an offer; the seller is counting that the house will in fact be sold and they will be able to move.  The sellers may be making an offer of their own on another home, hiring movers and packing, etc.  If they are dealing with a Buyer who is not serious - not only have they lost valuable marketing time, by having the property off the market; but likely will now incur other costs as well.  Will they still be able to move as planned?  Will they have to cancel their offer on their new purchase?  Perhaps have to re-stage the home in order to attract another buyer.

 

How much should the Earnest Money be?  This seems to depend on regional customs.  In the Washington DC market; deposits are expected to be from 1 to 3% of the purchase price.  With an average sales price of homes in DC over $300,000 that can mean an Earnest Money Deposit of 3-6 thousand dollars.  While that may seem like a lot of money to some - most people will need at least  3.5% of the list price to get a mortgage.  Everyone involved in the purchase wants to make sure the buyers - Do in fact have the money.

If deposits were only $500; many buyers would have no problem walking away or trying to put in multiple offers on different properties at the same time.  Both of which are big No-No's.

 

Who holds the money?  Typically your Buyer's Agent Real Estate Brokerage will hold the money in an escrow account.  Sometimes it is the settlement company, especially if it is a very quick closing time, such as an all cash deal.  Bank-Owned sales ask for the money to be held by the Listing Agents company.

 

Is it at Risk?  Do I get it back?  As I tell Buyers; Yes, your earnest money deposit is at "some" risk.  Most transactions have built-in contingencies, in case something goes wrong.  Such as, the Home Inspector says the roof is falling in and the buyer wants out or the appraisal or financing falls through.  What I can't protect a buyer from is "a last minute" change of mind or if they lied to the lender.  Then, yes, you could lose your money.  If the buyer decides to void the contract during one of the contingency periods - the earnest money is easily refunded.  

 

How is it different from my Down-payment?  Every penny of the Earnest Money deposit goes towards your down-payment and/or closing costs.  If your closing costs and down-payment are less than your earnest money deposit - the buyer is refunded the difference at settlement.

 

have more questions about the Earnest Money Deposit?  Drop me an email or leave a comment.

 

      

Call James for all your Real Estate needs and questions; servicing Virginia, Maryland and the Greater Washington DC area.

Coldwell Banker Residential Brokerage - Chevy Chase
5028 Wisconsin Ave NW  Suite 100
Washington DC 20016
202-351-5800 Main Offi

 

 

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Contact James Downing of the MetroDCHouses Team, if you are selling, buying or have questions!

Office: 202-469-6778   Cell: 703.244.3971

Licensed in Washington DC, Virginia & Maryland.

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Rainer
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Greg Wilson
1st Cornerstone Realty - Schaumburg, IL

Thanks James for the article.  I have clients that usually ask me that question.  Greg

Feb 12, 2009 02:15 AM #1
Rainmaker
178,651
Kevin Vitali
EXIT Realty- Massachusetts Short Sales & Residential Sales - Tewksbury, MA
Helping Massachusetts Home Buyers and Home Sellers

Great Explanation of an earnest money deposit... many low end buyers get so confused by it.

Feb 12, 2009 02:22 AM #2
Rainmaker
472,275
Janice Roosevelt
Keller Williams Brandywine Valley - West Chester, PA
OICP ABR, ePRO,Ecobroker

I appreciate this explanation and plan to send it to clients. It's not just the low end buyers in my sphere that don't understand it, but many first time home buyers

Feb 12, 2009 10:11 PM #3
Ambassador
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Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

James - Once again a great explanation. Down here about a thousand dollars is typical on most contracts that are below $400,000.

Feb 20, 2009 12:55 AM #4
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James Downing - Metro DC Houses Team REALTORS®, CRS, GRI, ABR,MRP, MilRes

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