Earnest money deposits play a vital role in developing trust within real estate transactions, and in the end, they benefit both buyers and sellers. So, what’s an earnest money deposit? It’s a financial demonstration of the buyer's commitment to purchasing the property, further assuring the seller that the buyer is serious about buying the property. Typically, an earnest money deposit ranges from 1% to 3% of the purchase price. This amount varies depending on local market conditions and other specifics of the transaction. 

When an earnest money deposit is due depends on when the sales contract or purchase agreement is signed, as both steps are usually taken in tandem. Although an earnest money deposit is not a down payment, earnest money deposits do go towards the eventual down payment if the purchase is successful.

Determining the Amount and the Custodian

The dollar amount of the deposit is determined via negotiation between the buyer and seller. During the negotiation process, both sides take factors such as the purchase price, local customs, and the level of competition in the market into consideration. The establishment of a fair and reasonable deposit amount ensures mutual trust and protects each party’s respective interests. It’s a win-win scenario!

While the sale makes its way through its final stages, the earnest money deposit is held by a neutral third party, such as an escrow agent, attorney, or title company. The custodian ensures that the funds are securely held until closing or until the conditions of the agreement are met. By agreeing to entrust the deposit to a neutral party, both the buyer and seller have peace of mind knowing that the funds are held by a safe and impartial entity.

Safeguards and Refunds for Buyers

While earnest money deposits offer several advantages, it’s crucial for buyers to understand the situations in which an earnest money deposit is refundable. In cases where the sale falls through due to contingencies outlined in the purchase agreement, like a failed inspection or inability to secure financing, for example, buyers often have the right to reclaim their earnest money deposit. 

Being sure that provisions like this are included in the agreement ensures that buyers are not financially penalized for circumstances out of their control. Buyers should always think ahead and provide themselves with a safety net in the event of unforeseen challenges.

Potential drawbacks…

Now that you’re aware of the benefits, we have to lay out a few potential cons buyers should also know about. First, if a buyer decides to back out of the deal for reasons not covered by the contract, they risk losing the deposit. 

Additionally, there’s a crucial factor in determining what is a good earnest money deposit. In highly competitive markets where multiple offers are common, buyers must consider offering a higher earnest money deposit to stand out from other interested parties. This means buyers tie up a larger sum of money in the transaction. If, however, the purchase goes through and the buyer successfully purchases the house, the money spent on the earnest money deposit will go towards their down payment and they will need to bring less cash to closing. 

Are you considering putting down an earnest money deposit or assessing third-party custodian options? Schedule a consultation with our team for a breakdown of these numbers here. Although we’re known for our work with locals in the Space Coast area, anyone is invited to check out our insider knowledge available on our blog!