What Is Earnest Money?

When a purchaser of a home, land, condo or business begins the negotiating process with his or her Realtor of choice, one of the first questions the agent will ask is, “How much earnest money do you wish to offer?”

Your answer may be, “What is earnest money, and how much should I offer?” The expected amount varies from property to property. In the listing contract, sellers set the minimum amount that is acceptable to them. Be sure to ask your Realtor what the seller wants. This figure can run anywhere between $1,00 and $10,000 on average. Many times the earnest money requirement is based on a percentage of the purchase price.

What is earnest money? For one, it is an incentive offered by the purchaser to motivate the seller to accept the buyer’s offer. Earnest money must be placed in the listing broker’s trust account no later than one business day after acceptance of the contract by both the purchaser and seller.

Earnest money comes back into the picture in a real estate transaction at closing. The broker who has held it brings the earnest money to the closing and the purchaser uses it as part of the down payment and closing costs. the transaction is completed and everyone is happy — usually!

However, when something goes wrong in a real estate transaction, earnest money can become quite significant. The offer of earnest money is based on the pretense that if the buyer changes his or her mind and backs out of the agreement, the seller gets to keep it in compensation for having taken the property off the market for a period of time.

If the purchase contract falls through due to any contingencies in the contract, however, (i.e. financing, sale of home, inspections) in most cases the purchaser will have the earnest money returned.

So when your Realtor asks how much earnest money you want to offer, begin by carefully considering how much you want the property. After the listing broker has your earnest money is not time to change your mind. Also, remember to use the earnest money as a vital part of your negotiations. It may be the factor that makes the deal!