What is Earnest Money?

Not an exciting topic, but whether you are a buyer or seller this is a term you need to be familiar with and understand because it is the first question on a purchase agreement.

This is the way I think of it. Let's say you owned something very expensive like a watch or a ring and you were willing to sell it. You negotiated a price with a friend (buyer) and they said they didn't have all of the money on them at that moment. They say they are "good for it", but have to pay you in a week. As a seller, you are concerned. What if this person is wasting your time and they never come up with the money? So you ask them for SOME money today and they can come up with the rest later. However, you aren't going to give them the item until they pay you in full. Basically you can keep the money it until they come up with all of the money.

This is just like earnest money. Just change my little story to an expensive house rather than a watch or ring.

Earnest money is showing you have money to spend on said item.  In real estate; it stays in a trust. Realtors nor the seller can hold the money. So there should be no worries that someone would spend it.

Earnest money can make first time home buyers nervous. They worry they won't ever see the money again, but that is not typically true. Even if the sale goes sideways, a majority of the time the buyer is going to get their money back. As a buyer, you need to have the money set aside, and assuming the sale closes...the money will not be given back, but rather be applied to the sale of your house.

There are a handful of ways to get your earnest money back. You should always make an offer on a house with the highest amount of confidence because you are investing before the house is yours, so while you can get this money back...it is not wise to be flippant on putting down offers on homes.

Because we typically put contingencies (or exceptions) on the contract; this gives us opportunities to not only back out of buying the property, but also to get our earnest money back. Common contingencies are inspections, financing, and having another property to sell. A common reason someone would back out of a real estate contract is during the inspection. If there are problems and both parties don't come to an agreement or the said repair makes a buyer nervous...earnest money is returned, the contract is canceled, and the seller has to re-list property (and disclose any new information that comes up from inspection report).

Probably the 2nd most common reason buyers need to back out is over financing. Maybe someone lost a job or there was a sudden death, etc. If a person realizes they can't get funding...that is another logical reason a house may not be sold. These contingencies protect the buyer often more often than a seller, however depending on how you look at it. They can serve both parties depending on the situation.

If you are considering buying a home REMEMBER you should have about 1% (of the purchase price of the home) saved for earnest money, another $300-600 for an inspection, and another $500 +/- for appraisal. 

Feel free to contact me if you have any questions.