What Sellers Need To Know About Earnest Money

What Is It? When You Can Keep It! And Everything Else!

what is escrow

What Is Earnest Money?

Earnest money is simply a deposit made to a seller that represents a buyer’s good faith to buy a home. An escrow deposit is also commonly referred to as “good faith” money. Using earnest money can give the buyer more time to figure out the entirety of the financial situation, get a property appraisal, conduct the title search, and complete inspections before closing. Earnest money is usually delivered during the signing of the sales contract or purchasing agreement and held by the title company.

When Do I Get To Keep Earnest Money?

Due to the nature of the house buying process, there are always contingencies with earnest money and its refund. These must be in the sale contract and predetermined. When you are selling your house, it is common for the purchase and sale agreement to have contingencies. Examples include:

Significant Issues With The House

If inspections determine there were undisclosed or significant issues with the property, a buyer can normally get their earnest money back. Keep in mind this is for “significant issues”, not cosmetic.

Significant Issue With The Title

Any ownership issues will be grounds for a buyer to get their earnest money back. You can prevent these issues by having a title search conducted prior to selling your property.

Low Appraisal

Most contracts have an appraisal contingency. Unless waived, the buyer can get their earnest money back if the appraisal comes in below the contract price.

If You Agreed To A Home Sale Contingency

Home sale contingencies state that for the buyer to purchase your house, they must sell theirs first. If you agree to this contingency, the buyer can void the contract and get their earnest money back if they cannot sell their home.

Financing

If a buyer cannot get the proper financing in the allotted amount of time.  unforeseen problems with financing like sudden unemployment or major health issues.

Keeping An Earnest Money Deposit

As the seller, you can keep an earnest money deposit if the buyer elects to void the contract on any ground that is not covered in the purchase and sale agreement. During a seller’s market, it is common for buyers to waive certain contingencies. For example, when the market is competitive, a buyer may make their offer and wave their inspection contingency. If the contract is voided due to an inspection issue with the home, you (as the seller) will be authorized to keep their earnest money. Also pay attention to the time frames within the contract. Most contingencies have an allotted amount of time. If the buyer elects to utilize a contingency that is expired, you could be entitled to keep the earnest money deposit.

Consider the ethical principle of keeping someone’s earnest money deposit. This is strictly left to your judgement as the home seller. If the buyer has a legitimate hardship, consider releasing it. Although you may be entitled to keeping it based on the terms of the contract, it may be ethically correct to release it. With that said, if the buyer wastes your time, has no grounds for a refund, and you determine these both to be the case, you should keep their deposit. Keep in mind you should always consult your attorney to ensure that you have legal right to keep this deposit!

Final Thoughts On Earnest Money Deposits

Earnest money can be referred to as good faith money, but it is not the same as a true good faith deposit. A potential buyer typically applies earnest money to the down payment of the house. Earnest money can range from 1% to 10% of the house price depending on the current state of the housing market you are selling in. The percentage will typically be higher in hot buying markets, and it will be lower in markets that are slower and less competitive.

Remember! The primary reason for earnest money is for a buyer to show that they are serious about buying the property. If they make an offer with a low earnest money deposit, you should question their seriousness about buying your home. The best course of action is to always refer to the contract you have made with the buyer. It will specifically stipulate all that is required of you, as the seller, and what is required by the buyer.

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