5 things home sellers should know about earnest money

When a buyer is ready to make an offer on your home they will offer to put down earnest money to show they’re serious about purchasing your home.

Your real estate agent will help you negotiate how much earnest money you should require the buyer pay and how, when and where the money will be sent. Buyers usually provide a check or money order to cover the earnest money, although it’s becoming more common to transfer the money digitally.

1. Why it’s important to you

When you enter into a contract with a buyer, you will take your home off the market while the transaction moves through the entire process. If the deal falls through, you will have to relist your home and start all over again, which could result in a big financial hit. Therefore, earnest money is meant to protect you (as the seller) if the buyer backs out.

2. How much should you expect?

Earnest money is typically around 1% - 3% of the sale price and is held in an escrow account until the deal is complete. If all goes smoothly, the earnest money is applied to the buyer’s down payment or closing costs.

If the deal falls through due to a failed home inspection or any other contingencies listed in the contract (we’ll look at those contingencies in a bit), the buyer gets their earnest money back. The practice of depositing earnest money can decrease the likelihood of a buyer placing offers for multiple homes, then walking away after you take your home off the market.

3. Where is the earnest money kept?

The earnest money is generally kept in an escrow account with the listing brokerage.

4. Who gets the money back if the deal falls apart?

It depends. Earnest money has contingencies that protect both the seller and buyer in certain situations.

When the buyer makes an offer on your home and you accept, the sale is only finalized when contingencies, or certain criteria, are met. They’re typically listed in the purchase agreement and cover the inspection, appraisal and mortgage approval. 

5. Reasons the buyer could back out:

Home Inspection

The home inspection is a common reason potential buyers back away from a deal. If your prospective home is inspected by a professional and some elements of the home come back in need of repair, a home inspection contingency can allow the buyer to back out of the transaction.

Appraisal

The appraisal contingency, which protects the buyer if the property is overvalued, is equally important. The lender hires a third-party appraiser to determine the fair market value of the home and to compare it to similar properties for sale. With this contingency, if the home is appraised at less than the sale price, they can choose not to move forward with the deal.

Bottom Line:

Earnest money is extremely important to both parties. It protects the buyer if something is wrong with the property, protects you {the seller} in case the buyer simply just wants out of the deal, and it shows you that the buyer is serious about your home.