SS136: What is Earnest Money in Real Estate

SS136: What is Earnest Money in Real Estate

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is Earnest Money in Real Estate. Earnest money is an important part of making an offer on a property. In this episode, Charles discusses what earnest money is, and why it shows the seller that you are serious.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  •       Earnest money is a payment (essentially a deposit) from a potential buyer to the seller in order to show good faith in their intent to purchase the property. Earnest money deposits are commonly referred to as “good faith deposits.”

o   The escrow process is designed to protect both the buyer and the seller, during the real estate transaction.

o   If the buyer’s offer is accepted, the good faith deposit is used towards their down payment, and closing costs. If the property sale falls through, in certain circumstances, it is possible for the buyer to receive some, if not, all of their earnest money back.

  •       What is the Importance of Earnest Money

o   An earnest money deposit safeguards the interests of both the buyer and the seller. It shows the seller that you are a serious buyer, with a serious offer. It protects the buyer because the seller essentially takes their property off the market once the offer is accepted. It protects the seller since if the deal falls through, they will need to spend more time and money marketing, and looking for another buyer.

  •       What is the Average Earnest Money Deposit?

o   While the buyer and seller are able to negotiate the exact earnest money deposit amount, it typically ranges between 1%-2% of the property’s sale price. In certain hot housing markets, the earnest money amount might be 5%-10% of the property’s sale price.

o   The higher the earnest money deposit, the more serious the buyer is to the seller. A low earnest money deposit might signal that a potential buyer is not all that serious.

  •       How do you Pay an Earnest Money Deposit?

o   The earnest money deposit is made after the offer is accepted.

o   Earnest money deposits are typically paid by personal check, certified bank check, or a wire transfer; into an escrow account. The escrow account would be held by an attorney, title company, or a real estate brokerage.

o   Earnest money deposit will stay in escrow until closing, or if the deal falls through.

  •       Is Earnest Money Refundable?

o   You make an offer on a home, and the seller accepts it; the sale is only completed when all of the contingencies have been met.

o   In most situations, if the buyer acts in good faith, and deadlines have been met, the buyer will usually get their good faith deposit back.

  • There are certain conditions where buyers are able to receive their deposit back:
    • During the inspection, the property has considerably more deferred maintenance than previously thought. The buyer can negotiate with the seller to get work done or receive a credit. They also can back out of the deal.
    • If a property appraises for a lower value than the agreed-upon purchase price. The buyer may negotiate a lower purchase price, move forward at the same price, and make up the difference with their lender or back out of the purchase.
    • Buyers that are unable to obtain a mortgage.
    • Buyers that are unable to sell their current home.
    • If these common contingencies were part of the contract, the buyer should be entitled to the full refund of their deposit

o   You can learn more about contingencies in episode SS129.

  •       How do you Protect Your Earnest Money Deposit?

o   Read, and fully understand the terms of the written contract.

o   Know the contingencies, and ensure contingencies for financing, appraisal, and inspections are included in the contract.

o   Use an escrow account. Utilize a legitimate third-party escrow (law firm, real estate brokerage, or title company). Never give earnest money directly to the seller. Be careful when wiring funds to escrow.

o   Follow the contract timeline. If the contract states that inspections must be completed by a certain date, ensure you meet that deadline.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is earnest money in real estate.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
Earnest money is a payment, essentially a deposit from a potential buyer to the seller in order to show good faith and their intent to purchase the property.

Charles:
Earnest money deposits are commonly referred to as good faith deposits. The escrow processes designed to protect both the buyer and the seller during the real estate transaction. If the buyer’s offer accept that the good faith deposit is used towards your down payment and closing costs. If the property sale falls through in certain circumstances, it is possible for the buyer to receive some, if not all, their earnest money back. So what is the importance of earnest money? While an earnest money deposit safeguards the interest of both the buyer and the seller, it shows the seller that you are a serious buyer with a serious offer. It protects the buyer because the seller essentially takes their property off the market. Once the offer is accepted, it protects the seller. Since the deal falls through, they will need to spend more time and money marketing and looking for another buyer.

Charles:
So what is the average earnest money deposit amount? Well, while the buyer and the seller are able to negotiate the exact earnest money deposit amount, it is typically ranges between 1% of 2% of the properties sale price. In certain hot housing markets, the earnest money deposit might be 5% to 10% of the properties sale price. Now, the higher the earnest money deposit, the more serious the buyer is to the seller. A low earnest money deposit might signal that a potential buyer is not all that serious. So how do you pay an earnest money deposit? The earnest money deposit is made after the offer is accepted, and earnest money deposits are typically paid by a personal check certified bank check or a wire transfer into an escrow account. The escrow account would be held by an attorney title company or a real estate brokerage. Earnest money deposit will stay in escrow until closing, or if the deal falls through, is earnest money refundable?

Charles:
You make an offer on a home and the seller accepts it. The sale is only completed when all the contingencies have been met. In most situations, if the buyer acts in good faith and the deadlines haven’t been met, the buyer will usually get their good faith deposit back. There are certain conditions where buyers are able to receive their deposit back during the inspection. The property has considerably more deferred maintenance than pre previously thought. The buyer can negotiate with the seller to get the work done or receive a credit. They can also back out the deal. If a property appraises for a lower value, then the agreed upon purchase price, the buyer may negotiate a lower purchase price, move forward at the same price, and make up the difference with their lender or back out of the purchase buyers that are unable to obtain a mortgage buyers that are unable to sell their current home.

Charles:
Um, if these common contingencies were part of the contract, the buyer should be entitled to the full refund of the deposit. You can learn more about contingencies in episode SS 1 29. That’s SS 1 29. How do you protect your earnest money deposit? Well read and fully understand the terms of a written contract. Know the contingencies and ensure contingencies for financing, appraisal, and inspections are included in the contract. Use an escrow account. Utilize a legitimate third party escrow, a law firm, real estate brokerage or title company, and never give earnest money directly to the seller. Be careful when wiring funds to escrow. Now follow by you follow the contract timeline. If the contract states that inspections must be completed by a certain date, ensure you meet that deadline and that will help to ensure that if the deal falls through, you can get, uh, all or the majority of your earnest money back. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show [email protected]. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

Links Mentioned In The Episode:

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top