Earnest money in its most basic terms is known as a “deposit.” When you book a vacation or buy a car, you often have to provide a cash deposit. The balance will still need to be paid on a specific date or financed over time. Earnest money, as it applies to a real estate contract, is similarly placed in a deposit. Thus, “escrow” is an account that keeps it safe and separate from other funds until the sales contract is final.

How is Earnest Money Used?

Earnest money, also perceived as a “good faith” deposit, demonstrates to a buyer that you are genuinely interested in purchasing the home when you include it with an offer. The amount expected can vary. In some cases, a specified dollar amount alerts the seller that you are interested in negotiating a binding contract. A check for earnest money almost always accompanies the initial offer on a property. The amount of earnest money might be as little as $100, but is usually a percentage of the property’s asking price.

As a general rule, a figure of 1 to 2% of the price is suggested as a guide for the earnest money to accompany the initial offer. Buyers seeking to signal that they have a serious interest in the property may choose to provide a larger sum of the earnest money in the hopes the sellers may forgo other offers.

The execution of earnest money can be complex. Various factors impact the disposition of earnest money depending on the state, the specific situation and the contract itself. Before signing an offer or writing a check for earnest money, make sure you understand the “rules of the game.” Be aware of the stipulations of your unique contract.

Understand the “Rules of the Game”

• There may be fees
• There may be additional rules governing
• You may be entitled to receive interest on funds that are being held
• You may be forced to forfeit your earnest money in whole or part if you choose not to proceed to closing
• If a transaction fails to close, even if it is no fault of your own, you may not be authorized to receive a total return of funds

Buyers and sellers alike are wise to rely on professional advice for real estate transactions. Although law governs many aspects of real estate, “local customs” play a part in all transactions. You will find that local experience and knowledge can be invaluable, especially when navigating through the purchasing process that starts with an offer. It is with an offer that a buyer will provide an earnest deposit and show their genuine interest in purchasing the home.