Sellers, Buyers and Earnest Money Deposits

If you are selling a property, nothing gets your adrenaline up like receiving an offer from a potential buyer. All the hard work and inconvenience has paid off. All you have to do is get through the offer and counteroffer process. Of course, you are not going to accept the first offer. Instead, you get on your thinking cap and start strategizing on an effective counteroffer. While you are thinking, it is important to remember the earnest money deposit.

An earnest money deposit separates the men from the boys when it comes to evaluating potential buyers. In essence, this is where you see both how credible and serious the potential buyer is regarding your property. It is both a statement of their liquidity and their knowledge of the process.

An earnest money deposit is also known as a good faith deposit. The amount of the deposit is entirely negotiable, but typically is an amount of ten percent or less of the sales price of the property. The custom and practice in your area regarding the percentage is the key. It will differ from area to area in the country, so make sure you get a bead on what is expected. If the customary deposit amount is five percent and you demand ten percent, it could be a deal killer from the outset and the buyer could move on to another property.

Once you have agreed on a percentage, the buyer should deposit the earnest money deposit with a third party. The party can be the escrow agent, an attorney or even a bank in certain states. If the transaction goes smoothly, the deposit is credited as part of the down payment on the home when the transaction closes. Ah, but what if it does not go smoothly?

The earnest money deposit can be forfeited to the seller in certain situations. Ostensibly, the particular situations are governed by what the parties agree to in writing and state law. In general, the buyer will get their money back if the deal falls apart because of a seller issue such as massive termite problems that were not identified by the seller before the offer was made. In turn, the buyer can lose the deposit amount if they simply refuse to go forward with the transaction. In some real estate contracts, this process is known as liquidated damages automatically awarded to the seller given the fact you wasted time with the buyer and had your property off the market.

All and all, earnest money deposits should be looked at as back up protection, not a potential profit center. If a buyer is unwilling to make a deposit, reject the offer and move on.