An earnest money deposit might also be referred to as a “good faith deposit”. You’re literally putting your money where your mouth is, pledging to purchase the investment property provided that the seller fulfills all of his or her responsibilities. In the event that something falls through, you can usually get this money back. However, there are situational elements and conditions to consider, as well as right and wrong ways to handle this process. Here are some tips and insights to help you prepare accordingly.
1. The Numbers An earnest money deposit (EMD) is standardized, for the most part, depending on the type of property you are purchasing. There is no exact rule as to how much is required for this deposit, but some sources will tell you that you need to come up with 1-2% of the agreed-upon offer price. Others will suggest putting down more earnest money to prove your level of interest. Do not listen to them!
Do You always want your EMD to be a set amount, never a percentage. In general, $2,000 is a good standard deposit amount; a significant number to show the seller you are serious, but a safe amount that isn't risky if the deal doesn't close. As a standard, residential contracts usually have deposits of $1,000 while commercial properties will have a deposit of $2,000. There are two important things to remember here:
- If you want, you can put a little more of a deposit toward a larger multi-unit property. For example, where you might only offer $2,000 earnest money for a 10-unit apartment building, you might want to put down $3,000 for a 30-unit property.
Don’t Your EMD should never be used to determine or display your interest level in a home. It’s a commitment to follow through with the buying process, and that’s all. This is not a negotiating point in any transaction and you should never feel pressured to make it one.
- The earnest money that you put towards a home offer is credited toward the down payment or closing costs of the loan at the time of closing, so you will get your money back if the deal goes through. DO NOT write a check for this until you have the seller’s signed offer in hand, though.
- It doesn’t matter if they’re going to sign the offer in five minutes, or if you shake hands and agree to the deal verbally. You should never hand over earnest money, even to your own realtor or attorney, until you physically see a signed offer in front of you.
2. What Happens if the Offer Falls Through? If the offer falls through because the inspection or appraisal failed or the seller backed out, the deal was lost through no fault of your own so you will be refunded the earnest money deposit.
In the event that you simply change your mind about buying the property after making a deposit, then congratulations are in order. You have successfully proven the entire point of why earnest money is even a thing in real estate.
The celebration is short-lived, though, because you are going to forfeit any earnest deposits made by pulling out of an offer without just cause. You do have the right to change your mind, but the seller also has a right to be compensated for their time, and for moving the listing on and off the market. This is another reason why you don’t want to put down more than $2,000, generally speaking.
3. Major Key In real estate investing, the EMD can seem like a drop in the bucket when compared to the bigger picture. However, sometimes the smallest details are some of the most important things to understand. When it comes to investing, you need to know the real estate process and earnest money is always going to be a part of it unless you are paying cash on the spot.
Are you looking to purchase a property and need a way to submit the opening offer? We invite you to download ourLetter of Intent (LOI)document to submit to the seller's real estate agent to make an initial offer and begin negotiations.