What are Earnest Money Deposits?

When you generally spot a property that you would like to buy, you offer some cash to fix the deal. This is to impress upon the owner that the buyer earnestly wants to buy the property. Thus, a deposit paid to demonstrate commitment and to bind the contract with the remainder due at a particular time is called earnest money. This is also sometimes referred to as good faith money. Earnest money should not be confused with down payment that the seller makes as an initial payment towards the price of the property. 

What should the earnest amount be?

There are no standard percentages for the earnest amount. It varies from region to region. In most areas, they are between 1% to 3% .Usually buyers do not offer more than 3% as earnest money since most of them sign a liquidated damages clause that limits the seller to 3% of the property price as damages in the event of a default. If, however, it is a hot market, where sellers are vying with each other, then higher earnest money may be offered to entice the seller and clinches the deal. : 

Safe guards

Never give the earnest money deposit to the seller. There are many incidences where fraudulent sellers have disappeared with the earnest money. In order to safeguard your interests you need to follow certain do‘s and don’ts  

  • 1.Give the earnest money to a third party such as reputed brokerage firm, legal firm or Escrow Company.
  • 2.Verify that the accounts are deposited in a separately maintained trust or account.
  • 3.Remember to ask for a receipt.
  • 4.Until your transaction closes allow no release or pass through of your earnest money

Who gets the earnest amount?  

If the deal goes well, then the earnest deposit is added towards the buyer’s down payment. When the deal does not go through, then many people believe that if it is the sellers fault the buyer automatically get the money back and if it is the buyer’s fault then the amount is forfeited.  

Nevertheless, in reality, for the earnest money to be returned back, consent of both the buyer and seller are required .If the seller refuses to return the deposit without any valid reason, the seller may be required to pay a penalty to the buyer as compensation. In case there is a dispute between the seller and buyer regarding the earnest amount, then they are asked to reach a mutual agreement. If nobody responds, then after a stipulated period, the money is given back to the buyer. If however, the seller contests the action and no mutual agreement is reached, then after a fixed period of about 3 years, the amount goes to the state coffers.  

Thus, it always makes sense to reach an agreement than block the money and be caught in the legal procedures, which can prove very messy and frustrating. Most times, these transactions go smoothly. It is only occasionally when one faces a disputed transaction. Most of the professional brokers are equipped well to handle them too.  

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