When working in real estate, Earnest Money is one of the primary means of assurance to a Seller that a Buyer is serious about purchasing their property. Earnest Money is actually considered “Good Faith” and typically accompanies an offer on a property, shows the Seller you are a committed buyer, and helps pay for a portion of your down payment.  In order to prove a Buyer’s offer to purchase a property is in “Good Faith,” or “Earnest,” a Buyer needs to put down funds as soon as the ink of their signature dries on the contract to purchase.  As a realtor, and a Seller at the time of selling our previous home, I can speak about this first hand, especially in a multiple offer situation such as ours.

If Earnest Money was not a requirement, a person could make lots of offers on lots of homes, essentially tying them up until they decided which one they liked best.  This could technically take a Seller’s home off the market and miss being considered by other buyers and/or their agents.
When is Earnest Money Due?

In the Crested Butte area, most Earnest Money is due within 48-72 hours upon mutual acceptance of the contract (or MEC). A lot of times, if a Buyer is offering on a property from out of town, say they went back home from their vacation, the agent usually requests a copy of the check via scan or fax to be delivered to the Seller and a receipt of when it was sent out via FEDEX or UPS to the real estate office.  Earnest money is also held in an escrow account managed by the title company.  This deposit is then applied to a person’s closing costs or returned to the Buyer at closing.
How much Earnest Money should I put down?

The earnest money amount can vary from state to state, what the Seller requires, and the current real estate market.  Typically, on average, a Buyer should expect to write an earnest money check form 1-2% of the total purchase price.

In a market where multiple offers are common, and the demand for property is high, the Seller may require a higher deposit, perhaps as much as 2-3%. Sometimes, when there is a bidding war, a large Earnest Money deposit can swing the pendulum in a Buyer’s favor.  A larger deposit may even sway the Seller to come down off their price more than expected also.

Who holds the Earnest Money?

After your offer is accepted and both Buyer and Seller have signed the purchase agreement, the Buyer usually pays in the form of a personal or certified check issued to the title company.  

The funds are then held in an escrow account until the sale of the property is in the final stages and heading towards a successful closing. On the day of closing, the funds are released from escrow and applied to the Buyer’s down payment.

Is the Earnest Money refundable?

If the deal falls through, sometimes a small cancellation fee is usually taken out of the deposit, but the remainder remains in escrow.  Whichever entity holds the Earnest Money deposit determines whether a Buyer should get their Earnest Money back under the terms of the agreement.  Make sure how the refund is handled is covered in the purchase agreement.

During an inspection, if something is found to be seriously wrong with the property, typically a Buyer can get their Earnest Money back, depending upon written notice and if it is within a specific timeframe.

Earnest Money – Time is of the Essence

In our unique situation, we had negotiated and accepted an offer (first offer). The next day a second offer came in much higher than the first offer. Of course we were devastated and didn’t feel there was anything we could do except, accept the 2nd offer a the backup offer.  The next day, our office manager called while I was hosting an open house, and asked if she should call and request the earnest money because it hadn’t been delivered as yet. I asked her to hold off on calling and immediately called an attorney asking for advice on our odd situation. As luck would have it, we were advised to type up a letter rescinding our contract with Buyer #1 and then signing and accepting the second offer from Buyer #2 within a matter of hours because the second offer had an acceptance deadline of that day.  So within a matter of hours, we made a substantial amount more, all because the earnest money was not delivered on time.

Overall Earnest Money is an integral part of a real estate transaction and binds the Buyer to commit to one specific property.  From a Seller point of view, it is one more assurance that the deal is moving towards closing. Timely delivery of Earnest Money is the most important rule when submitting a real estate offer.