What is Earnest Money?

In the context of real estate, “earnest money” refers to a deposit made by the buyer when making an offer on a property. It is a good faith payment showing the seller that the buyer is trustworthy and serious about purchasing their property. Unlike a down payment, which is a larger sum paid at closing, the earnest money is a part of the initial offer and signals a buyer’s commitment to the deal. Sellers often take their property off the market once they accept an offer. If the buyer backs out without a serious cause, their earnest money provides the seller with financial compensation for the lost time.

Shows Commitment

When a buyer includes earnest money with their offer, it shows they are willing to put a portion of their assets on the deal. This commitment often influences the seller’s view of the buyer’s sincerity and the strength of the offer.

Protects Both Parties

Earnest money acts as a form of legal protection for both parties. It discourages the buyer from changing their mind without valid grounds, relieving the seller when an offer is accepted but not completed.

Increases Acceptance Rate

An offer with a higher earnest money deposit is often more attractive to a seller, especially in competitive markets. Earnest money could make the difference between having your offer accepted or passed over for a more influential one.

The Right Amount of Earnest Money

The amount of earnest money can vary based on the type of property, the market, and the total purchase price. If the market is hot, you may want to offer a higher amount to ensure your offer is accepted. Generally, it ranges from 1% to 5% of the offer price. However, it can be as high as 10% for highly competitive homes with multiple buyers interested.

The Escrow Process

Once the seller accepts the offer, the earnest money is typically held in an escrow account, which means it is securely kept by a third party like a title company, law firm, or real estate broker.  Acceptable forms of payment are wire transfers, certified checks, or personal checks. The third party keeps the money until closing when it will go towards the buyer’s down payment or closing costs. 

When is Earnest Money Refundable?

The return of earnest money is not automatic; its refund is contingent on the parties’ agreed-upon terms. If the buyer pulls out without a valid reason, the seller may be entitled to keep the earnest money. Likewise, if the seller fails to meet the conditions of the offer, the earnest money is usually returned to the buyer. Typical situations where the buyer can walk away with their earnest money can include the following: 

• When a home inspector finds severe housing problems 
• If the appraisal amount is lower than the home sale price and the seller will not re-negotiate the sales price 
• When the buyer can’t secure financing 
• When a buyer is unable to sell their current home before closing on the new one

Buyers will forfeit their earnest money if they waive their financing and inspection contingencies and their mortgage doesn’t go through. Buyers can also lose their earnest money if they fail to close on the agreed date.

Need Further Guidance?

Whether you are a buyer looking to show your commitment or a seller who wants to make a wise choice when vetting offers, understanding earnest money can lead you to a more secure and successful transaction.  If you are looking to buy or sell your home, contact Bradford Miller Law, P.C. We’d be happy to help guide you in your real estate journey.

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Supply and Demand

There is a fundamental economic principle that supply and demand influence prices that also hold in real estate. In real estate, high inventory equals a buyer’s market. If there are more homes for sale than interested buyers, this excess of inventory can result in a buyer’s market. Buyers will find they have more options, less competition, and greater negotiation leverage. Conversely, low housing inventory compared to the number of prospective buyers equals a seller’s market. Sellers can often ask for higher prices due to increased competition among buyers. Monitoring local housing inventory trends can provide insight into the market’s tilt.

Days on The Market

How long homes stay on the market before they are sold can tell us a lot: a higher number of days on the market suggests homes aren’t selling as quickly. This could mean that the market is cooler—a sign of a buyer’s market where purchasers can afford to take their time and weigh their options. If homes sell quickly, it indicates strong demand, a hallmark of a seller’s market. A few days on the market can often lead to bidding wars, which is good news for sellers aiming for a top-dollar sale.

Price-to-List Ratio

The final home sale price compared to the initially listed price can reveal which way the winds are blowing in the market. Buyers are often in a stronger position when homes sell for less than their asking price. This could indicate that buyers have room to negotiate, a vital feature of a buyer’s market.  If sale prices are at or above the asking price, it suggests that the wind favors sellers. This trend shows that there’s enough demand in the market for sellers to not only meet their listing prices but even exceed them, a common scenario in a seller’s market.

Understanding whether you’re in a buyer’s or seller’s market is essential for anyone considering listing their home or buying a property. You can gauge who might get the better deal by keeping an eye on inventory levels, days on the market, and price-to-list ratios. 

Once you list your home and have an offer, feel free to contact us; we would be happy to help you throughout the process.

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