Aug. 5, 2009

Earnest Money Explained

Earnest Money is the real estate industry term for what is essentially a good-faith deposit.  It is money that you, the Buyer, include up-front with your initial offer.  It demonstrates both your commitment to buying the home,  as well as your financial ability to do so. In effect, you're saying, "I am entering into a contract with a serious commitment, and here is my money to prove it." When the transaction closes, the amount of the Earnest Money can be applied to closing costs, down-payment, or returned to you in cash, depending on your preference.  Generally, the Earnest Money (EM) is expected to be about 1% of the offering price of the home. In more competitive markets, I've seen that figure rise closer to 2-3%, though that is usually in the case of multiple bids, when you need to make your offer stand out above the rest.  Most often, the EM check is handed over to the Buyer's Agent at the  signing of the initial contract (aka Purchase and Sale Agreement), then deposited into an Escrow account upon acceptance of the offer. With certain exceptions, the EM check is made out directly to the Escrow company, as opposed to the agent. The agent delivers the check, but never has direct control over the actual funds. This is important to remember, as it can feel a bit awkward to just hand over a check for several thousand dollars, especially if you haven't known your agent very long. It helps if your agent writes interesting and educational blogs for you to read ahead of time, thus establishing credibility and a professional comfort level you might not find elsewhere.

istock_000004415349smallBy the way... A Google image search of "Earnest Money" came up with this picture.  I highly recommend against paying your deposit in this way. In fact, it's probably never a good idea to carry around huge bags of cash like that...Of course, that's just my opinion.

Thanks for reading!

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Rob LeRoy is a Seattle real estate agent and social media marketing coach with eXp Realty.

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