Earnest Money: What Is It?
Earnest money is a deposit the buyer puts down to show they are serious about purchasing a property. This is particularly important in a seller’s market, as is the case in today’s Bend and Central Oregon real estate market. Typically in a seller’s market, available inventory is low and demand is high. The result is that there are multiple motivated buyers for every home that is for sale. Earnest money signifies that the buyer is doing more than browsing.
This type of deposit is a gesture of good faith. It does not obligate the potential buyer to actually purchase the home. The seller is, however, obligated to take the house off the market during the inspection and appraisal process. A contract is drawn up and the funds are deposited into a trust or escrow account. The money is held until closing, when they are applied to closing costs and the buyer’s down payment.
How Is the Amount Determined?
The standard for the amount of earnest money a buyer puts down is 1% – 2% of the asking price, but it can be higher. The more money you put down at this point, the more serious you appear to the seller.
Once the amount is established, the buyer writes a check or wires funds to a neutral third party, such as a title company or escrow company. The deposit is never paid directly to the seller.
Is Earnest Money Refundable?
Whether or not the buyer’s earnest money is refundable depends on the contingencies, or conditions, included in the contract. Some of the pre-arranged agreements by which a buyer can back out and get their money refunded include:
- The home fails the inspection
- The buyer can’t secure financing
- The home doesn’t appraise at purchase price
- There’s an issue with the title search
The buyer can waive contingencies, which increases the risk that they forfeit their money altogether if things go south. Of course, fewer contingencies can make the offer all the more attractive to the seller. The responsibility is on the buyer to adhere to set deadlines. If the buyer can’t meet the established deadline and the seller doesn’t want to renegotiate a date, that money is lost.
In general, the money is refundable until the inspection period ends. A buyer can also tempt a seller with non-refundable earnest money upon a signed and accepted offer.
Earnest money is always refundable if it’s the seller who backs out of the deal.
How Can Buyers Use Earnest Money Strategically?
Buyers can employ a number of strategies to make their money work for them in a competitive market. These include:
- Release some or all of the earnest money to the seller as non-refundable at the end of the inspection period
- Limit contract contingencies
- Release earnest money upon an accepted offer.
Not many buyers have the risk appetite to risk losing non refundable earnest money, which is why it is a such a powerful strategy. You are indicating to the seller how confident you are in your ability to close. This goes a long way when they are comparing multiple offers. The risks include finding a deal breaker in the inspection and forfeiting your money if you back out for any reason.
Get in touch with us at Bend Relo at Fred Real Estate Group to learn more about how we can help you reach your real estate goals.
Also read: Appraisal Contingency: Waive It or Leave It?