The Importance of Being Earnest

One of the first discussions I have with first-time homebuyers is the Earnest Money talk. Many potential buyers are familiar with the concept of the down payment, but are caught a little off-guard with the prospect of having to write a check to accompany their offer and have those funds imminently available.

First a definition. Earnest money is a good-faith deposit given to the seller at the time a sale contract is signed. In fact, the sale agreement is often referred to as the Earnest Money Agreement, and in Oregon, the standard real estate contract spells out the conditions of how the earnest money will be handled between the buyer and seller.

The money does not go directly to the seller (in most standard transactions). Upon mutual acceptance of the offer, the money is deposited into a client trust account or more typically in an escrow account. The money cannot be released to the seller or back to the buyer unless the escrow agent receives instructions from both parties that the transaction has either concluded successfully or has mutually terminated.

To protect their earnest money deposit, it is important that buyers act decisively and conduct their due diligence within the timeframes expressed in the sale contract. This means getting formal loan application completed, if needed. It means getting the home inspection done and negotiating any repairs. It means reviewing the preliminary title report for any red flags. It means ensuring that any needed information is quickly delivered to the lender to keep the closing date on track. A good real estate broker will communicate the timeframes and educate buyers about their options with respect to protecting their earnest money.

Earnest money also serves as ‘liquidated damages’ in the event that the buyer does not perform to the specifications of the sale contract. For example, if at the eleventh hour, after all timelines for home inspection, title report inspection, etc. have passed, the buyer has a change of heart and simply wants to withdraw from the contract, the seller may be entitled to keep the earnest money as compensation (or liquidated damages) for having taken the property off the market for a period of time.

While there is no set amount or percentage of earnest money required, a good practice is at least 1% of the sales price, sometimes more when the property is a hot commodity and you want to make a good impression. However, sellers may test your commitment by asking for additional earnest money as part of a counteroffer.

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Add comment November 9th, 2005