Whose Earnest Money Is It?

When dealing with someone whose got something you'd like, have you ever been asked the question, "What's it worth to you"? If you haven't, you will some day. While that question may seem more rhetorical than actual, in the real estate business, often, the answer comes in the form of an Earnest Money Deposit (EMD).

What is an Earnest Money Deposit and why is it necessary when purchasing real estate?

First, sometimes as little as a dollar may suffice as the EMD, and sometimes, nothing at all. While it is customary, it is not essential in all states. Why? Since it is a show of commitment of "good faith" by the buyer, normally, it serves to demonstrate the buyer's seriousness of intent to purchase through the deposit of earnest money into an escrow account. Is it ususally part of the real estate transaction process? Yes.

Often, in cases involving transactions between friends or family, no EMD is involved. Remember, an EMD is a commitment; a deposit that is held in escrow until settlement. At which time, it is applied to the buyer's closing or settlement costs.

Earnest money deposits not only provide the seller a sign of commitment by the buyer, it also serves as a source of security as well. If the transaction is not consummated, and the buyer is found in default, the EMD may be forfeited. When the contract is ratified, the earnest money is placed in an escrow account. Once this deposit is made, the money no longer belongs solely to the buyer, but is now jointly owned by both parties to the contract.

The Deposit Will Be Held in Escrow Until:

1. Settlement occurs. In which case, it will be credited to the buyer towards the sales price.

2. All parties have agreed to its disposition.

3. The court has ordered its disbursement.

4. Finally, it is disposed of in a manner authorized by the laws and regulations of the appropriate jurisdiction.

In other words, if the buyer is in default, they will, most likely, lose their EMD.

How Much Should the Earnest Money Deposit Be?

That depends. On the market, and, in many cases, the value of the property. The EMD is normally no more than two percent of the purchase price. In a seller's market, the EMD is normally larger, indicating to the seller the offer is a strong one. Similarly, popular properties may generate more than one offer, subsequently, increasing the amount of the earnest money deposits from interested buyers.

Good faith, interest, and trust are all components of real estate transactions. The EMD provides security for both the buyer and the seller. The buyer feels they have a "monetary interest" in the property from the day of ratification. The seller, on the other hand, finds security in the commitment the buyer has made, and availability of compensation through forfeiture of the EMD, should the buyer back out of the contract.

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