Four Common Misconceptions About Real Estate Transactions:
Part Four—Ten Facts About Earnest Money
Earnest money is proof to the seller that the buyer is committed to purchasing the property. It gives the seller the confidence to take their home off the market.
- Earnest money is set when the contract is written and accepted.
- It is not a set percentage of the purchase price of the home. The percentage is the amount the buyer wants to offer that the seller is willing to accept.
- Earnest money is typically set around 1% to 2% of the purchase price.
- Sometimes the amount of the earnest money can be a factor in winning a bidding war for a house in a seller’s market.
- Once a check for earnest money is received, it is deposited into an escrow account. This is typically held by the listing office.
- Earnest money should never be given directly to the seller. To avoid issues with refunds on earnest money, it should always be held in escrow by a third party.
- A receipt (usually a copy of the check on the letterhead of the company managing the escrow) should always be provided. It should include the payment date and the name of the person accepting the payment.
- If all goes as planned, the earnest money goes toward the down payment.
- If plans go awry, like if the offer was contingent upon financing or inspection that did not go as planned and buyer and seller could not reach an agreement, typically the earnest money is returned to the buyer.
- The only way that the buyer loses their earnest money is if the buyer backs out of the contract for any reason after all contingencies are met.
We hope you’ve learned a lot from our 4-part series on common misconceptions about real estate transactions. Contact us today with questions or comments. To keep up with important housing market updates, follow us on Facebook and LinkedIn.