Earnest Money Deposit
Definition:
An earnest money deposit is a sum of money that a buyer provides to show their good faith and commitment to purchasing a property. This deposit is typically held in an escrow account and credited toward the buyer’s closing costs or down payment once the sale is completed. If the buyer backs out of the transaction for reasons not covered by contingencies, the seller may be entitled to keep the earnest money as compensation for taking the property off the market.
🔍 Did You Know?
Earnest money deposits typically range between 1% and 3% of the property’s purchase price, though this can vary based on market conditions and the specific terms negotiated in the purchase agreement.
Examples:
Example 1:
A buyer offers $300,000 for a home and includes a $6,000 earnest money deposit in the purchase agreement. If the buyer follows through with the sale, the $6,000 will be applied toward the closing costs. If the buyer backs out without a valid contingency, the seller may keep the deposit.
Example 2:
An investor puts down $10,000 in earnest money to secure a commercial property valued at $500,000. The earnest money is held in escrow until the deal closes. If the buyer cancels due to a failed financing contingency, they will get their earnest money back.
Why It’s Important:
Earnest money protects both buyers and sellers during a real estate transaction. For buyers, it demonstrates their serious intent to purchase the property, helping to make their offer more competitive. For sellers, earnest money provides financial security by compensating them if the buyer pulls out of the deal for reasons not covered by contingencies. It also helps ensure the sale process moves forward smoothly.
Who Should Care:
- Homebuyers who want to strengthen their offers and show commitment to the purchase.
- Real estate investors making competitive offers on properties in a hot market.
- Sellers who want assurance that the buyer is serious about completing the transaction.
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