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Why do you need earnest money?
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Why Do You Need Earnest Money?
You include earnest money with an offer on a house to show the seller that you are serious about
purchasing the house. It becomes part of the down payment if the offer is accepted, is returned if the
offer is rejected, or is forfeited if you pull out of the deal for reasons other than those stipulated in the
offer. A financing contingency is an example of the latter - if your offer was contingent on getting a loan,
and you can't, you can cancel the contract and get your earnest money deposit back.
How Much Earnest Money?
The size of the earnest money deposit is up to you. Real estate agents will sometimes outright lie, and
tell you it is this or that amount, or this or that percentage of the offering price. In reality, you can write
the offer with a one dollar deposit if you wish, and agent still has to present the offer.
Naturally, an offer with one dollar of earnest money may not be taken seriously, and the agent may
even persuade the seller to reject your offer. It is a good idea to ask what the local norm is. We just
bought a house in Colorado, and the agent told us that a $1,000 deposit was normal. Had he said $5,000
was normal, however, I still would have given a deposit of just $1,000. That is enough to be serious in
my mind.
You can also do a two-part deposit. You can make an offer with just $100 in earnest money, for
example, but specify in the offer that this will be increased to $2,000 once the offer is accepted, or once
when an inspection, appraisal or other contingency is met. This keeps your money from being tied up
until you know that the seller is serious about selling to you. This will usually still be seen as a serious
offer if the deposit is to be seriously increased at some point.
Who Gets The Earnest Money Deposit?
Never give your earnest money check to the seller. The last thing you want is a seller trying to keep your
money after you pull out of a deal because of financing problems, termite infestations or other valid
contingencies in your offer. If the real estate office handling the sale has an escrow account, it should be
safe to make the check out to the broker. Otherwise, use a title company or other escrow account, but
in any case, always give your deposit to a third party to hold.
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http://www.closingcow.com
Call Us or Text Us 323-230-3502 Watch Our Video on YouTube click here
Our YouTube Channel www.youtube.com/watch?v=KVoSsqk_Pr0
Ask how they handle it too. I once had an offer rejected, and then had to wait a week to
get my money back. They told me that they had to wait for my check to clear before they could issue a
check back to me. I prefer it when it is handled like it was on our recent home purchase. They just hold
the check until the offer is accepted, and return or destroy it if the offer is rejected.
How To Protect Yourself
Things can happen, right? If you pull out of the deal for some unforeseen reason - one not included in
the contract - you'll lose your deposit. However, the seller could also sue you for additional damages or
even force you to buy the home. To protect yourself, have a clause in the offer that specifies the earnest
money as "liquidated damages" if you are in default. The real estate agent can help with the language,
but this basically means that if you need to default on the contract, the seller can't ask for more than
what you have already included as earnest money.
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