Sunday, June 22, 2008

How much Earnest Money do we need with an offer?

Hoo boy. This can often be a struggling point in the negotiating process.

First, do you know what earnest money is? Sometimes people call it escrow money. Earnest money is money that is submitted along with an offer. It is designed to show "earnest" or the seriousness, if you will, of the buyer. So, in theory, the more earnest money, the better.... at least in the eyes of the seller.

So, if you and I were working together, and you wanted to buy a house, we would sit in my office and write up an offer. During that process we would discuss how much money to submit with the offer. So maybe the purchase price is $150,000. We give a check, written out to the agency representing the seller for say, $1,000. That check is not given to the seller's agent until we have a "meeting of the minds", or a completely executable contract. That money will go into an escrow account that is managed by a representative of the seller... usually their real estate broker. If the contract is successful, the $1,000 is applied against the purchase price at closing. So you, the buyer will be expected to come up with the remaining $149,000 at the closing. (Don't sweat it.. it doesn't mean all cash. Some of the $149,000 will be in the form of a mortgage).

The listing broker has a fee that will probably be paid at the closing, so at the closing the sellers will get a bill that shows the $1,000 in escrow and that can be accessed by the broker to help pay said fee.

Oh, remember I said it can be a struggle during the negotiations? What I mean is, if the listing broker thinks that you have not put up enough money with the contract, they might advise their client, the seller, to not take your offer. In fact, part of their counter offer might include increasing your escrow from $1,000 to say, $5,000. Seems that the concept is that you would find it harder to "walk away" from $5,000, as opposed to $1,000.

You get your escrow or earnest money back if the contract does not go through.... as long as your reason for not proceeding is covered in the contract and all parties agree that the money should be returned. HOWEVER... if the seller feels that they have been deceived, or dealt with in a deceptive manner, they may tell their broker to NOT release the money back to you. This, then may become a legal issue. If you agree that the seller deserves to keep your deposit money, then there is no issue. But, if you demand that you get your money back, you and I may be forced to prove that you are within your right to get that money back.

This doesn't happen a lot, but it does happen from time to time. As a real estate broker, I try to impress on you the seriousness of a contract and how to avoid having a dispute over the funds held in escrow.

So, back to original question... HOW MUCH is enough. The fact is there is no answer to that. Most professionals agree that the escrow funds should be proportionate to the sale price. The higher price house, a higher escrow figure can be expected. I'm cool with that, but to be honest with you, every transaction is different, so you need to have a detailed discussion with your agent about this. The situation might warrant you putting an unusually large amount down... you're trying to beat out other offers and you want to express your seriousness. Your situation might be such that you are not liquid enough to put a lot down, and this house is selling for say, $45,000... not $450,000!

If you are serious about making the offer, you can never put too much down. Just make sure it is going into an escrow account and not in some one's general operating account.

ALERT... new construction rules may be different. But I've put too much in this blog... If you have questions... email me at

That's all for now... keep the faith!

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