Earnest money, sometimes called a good faith deposit, is money the buyer places in escrow to show his/her earnest desire to purchase a property. Earnest money is not required, however, if there are multiple offers on a property, the earnest money may be used by the seller as a tiebreaker. The money serves two primary purposes: it shows the seller that the buyer is serious and able in his/her desire to purchase the property and it ties up the buyer, so he/she is not free to purchase another property. The earnest money is usually placed in a non-interest-bearing escrow account. When the sale is finalized, the earnest money is applied to the purchase price of the property. If for some reason, the sale does not go through, the earnest money is usually returned to the buyer.
How much Earnest Money is Customary?
Depending on the market, the amount of earnest money is negotiable. In the Columbus, Ohio market earnest money is typically 1-2% of the purchase price. In other markets, 5-10% is customary. The money is usually held by the buyer’s broker but can be held in escrow by the title company. The amount of earnest money is intended to be large enough to discourage the buyer from walking away from the property on a whim, but small enough that won’t put a major dent in the buyer’s finances if they do need to cancel the deal. In most cases, the earnest money will be applied towards the buyer’s down payment and closing costs.
Who holds the Earnest Money?
In a typical real estate transaction, the buyer’s broker holds the earnest money. The broker holds the money in a non-interest-bearing escrow account. The title company may hold the earnest money if that is negotiated as part of the contract. The advantage of having the earnest money held by the title company is that it is one less thing for the buyer’s broker to keep track of.
When do I get my Earnest Money back?
The earnest money is typically applied to the buyer’s down payment or closing costs. If the sale does not go through, in many cases, the earnest money is returned to the buyer. There are some situations in which the seller may be able to keep the deposit. If the contract is terminated due to the buyer’s failure, the seller may be entitled to keep the earnest money. For example, if the buyer fails to obtain financing or backs out of the deal for no specific reason, the earnest money may be forfeited. However, if the deal falls through due to no fault of the buyer, the buyer should be able to get his/her earnest money back.
What if the seller refuses to return the Earnest Money?
To return the money to the buyer, the seller must sign a release of escrow. If the buyer and seller cannot reach an agreement, the buyer’s broker has two options: hold the money until an agreement is reached or turn over the money to the state real estate commission for mediation. Your buyer’s broker can explain your state-specific laws and local customs.
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