Explaining Earnest Money

Posted by Professional Realty on Monday, August 10th, 2015 at 9:45am.    4527 Views

Buying a Home: Understanding Earnest Money

earnest money, what is earnest money, how much earnest moneyOne confusing subject for many first time home buyers is earnest money. What is it? Is it necessary? How much? Will I get my earnest money back?

A simple way of understanding earnest money is to consider it as a "good faith" deposit on real estate to show sellers you're a committed buyer. Here in Ohio and in many states, earnest money is customarily between $500 and a $1,000, though for luxury properties or if a buyer finds a "must have" property, I've seen earnest checks up to $5,000. On most transactions here in the Buckeye state, $1,000 is usually sufficient.

An important part of the home buying process, let me take you back to the old west to paint an example for you. Let's say a rancher has a decent spread, already suited for cattle but getting out of the business or moving out of state and saunters into the saloon and announces the property is for sale. There are a group of people interested, however, one patron states he'll meet you in two weeks to purchase the property.

In good faith, the rancher decides to sell to this individual, but at the appointed time, the would-be buyer is nowhere to be found. Perhaps he bought another property, or ran into financial hardship. The rancher heads back to the saloon to find the other interested buyers only to find that they have moved on, bought other properties of interest and now the rancher may have to wait a very long time to successfully sell his property.

Now, had the seller asked for the prospective buyers' earnest money, at least he'd have that to show for his trouble and lost time.

If you think about it, buyers could make offers on several properties, without earnest money, essentially removing them from the market and why sellers consistently don't entertain offers without earnest money. It's best to be prepared for buying a home in today's competitive market.

Earnest money is one expense to prepare for, indeed, there are several extra costs of buying a home many buyers need to consider.

Let's assume you have a successful offer on a $350,000 home, and your earnest money was $1,000. Upon a successful closing, the earnest money will go towards closing costs and down payment. You can, however, get your earnest money funds back if inspections reveal something you don't like about the property, like a faulty foundation. One important thing to note, all parties are required to sign a form for the return of the earnest money in any situation before it can be returned to the buyer.

Earnest money checks are normally made out to the brokerage, not the agent and held by the brokerage until notification the buyer's offer is accepted. The funds are then deposited into the brokerage's escrow account, a special account strictly for earnest monies with no commingle of any other funds.

2 Responses to "Explaining Earnest Money"

Trish wrote: I always wanted to know how that worked, thanks!

Posted on Tuesday, August 18th, 2015 at 3:26pm.

Greg Hancock wrote: I'm glad it was helpful Trish, enjoy your week.

Posted on Tuesday, August 18th, 2015 at 3:35pm.

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