How Does Earnest Money Work?
What is “EARNEST MONEY” ?
In the far distant past, real estate buyers and sellers were said to have first “bargained” for the property in question. The process of serious negotiation was said to be bargaining in “good faith” or “in earnest”. Each party sought the assurance of the other that they were sincere in their desire to buy or sell. In those days, there was little need to write down the details of the agreement since, as they said then, “A man’s word is his bond”. Probably no money changed hands either until the sale was consummated.
Later, as agreements for the sale of real estate were required to be in writing, it became common practice for the buyer to offer a quantity of money (or other valuable consideration) as “earnest money” ,also known as “good faith money”. It’s purpose was to offer a visible-sign that the buyer intended to complete the sale. The amount was usually small, but it’s significance was great. It, along with the written contract it accompanied, took the place of a handshake agreement.
Today, an “earnest money” deposit placed in an escrow or trust account is commonplace. The purpose is the same, to assure the seller of the buyer’s serious intention to complete the purchase.
The amount of money placed as a deposit when purchasing real estate is negotiable between the buyer and seller. Most agree, however, that the larger the deposit, the more serious the buyer’s intentions.
The idea of a deposit is to insure that the buyer fulfills his or her obligations under the agreement of sale. If a buyer wi1lfully defaults on those obligations, the deposit may be forfeited. Most sellers require a deposit 1arge enough to insure that the buyer will not default.
From that point-of- view, sellers may look with suspicion upon buyers who refuse to provide a deposit or insist on a very small one. After all, a genuine buyer, who sincerely , intends to complete a sale, has no qualms about making a substantial deposit.
Buyers and sellers should both read and understand the Escrow terms and conditions in the purchase contract. When selling a home, ask your agent for advice about the amount of deposit you should require from buyers.
A seller can request a larger escrow deposit on his counter-offer after a potential buyer has made an offer.
Just remember that the buyers offer is no longer valid after you counter and he may reject your counter-offer and go on to another house.
By Steve Myers
All articles are for educational purposes only and are not meant as tax or legal advice! See a CPA for tax advice or an attorney for legal advice, or any other appropriate professional for the sector!
