Earnest Money is the deposit the buyer provides to show good faith that they are serious about the sale of the new home. It’s fully negotiable, does give more power to the buyers offer the higher it is, and the industry standard is 1% of the purchase price. We have seen earnest money as low as $500-$1000 on occasion and while this can cause a counter offer, is sometimes acceptable to the seller depending on buyer financing or the situation. Earnest Money shows the seller that the buyer intends to perform the terms of the real estate contract and if you do not, the seller can obtain the earnest money due to a breach of contract.
After an accepted offer, and before the closing date is defined as the escrow process. During this escrow process, the earnest money is still the buyers money that is held by the title company or an agreed upon neutral 3rd party. This should be deposited with that agreed upon party within 24 business hours of contract acceptance in the form of a personal check, money order, wire transfer, or an agreed upon form of payment at contract negotiations. In a successful closing, a buyer can use this money towards their down payment, closing costs, or as a refund at close.
There are stipulations that allow the buyer to cancel the contract and still obtain this earnest money. These stipulations are laid out through contract contingencies. An inspection contingency allows the buyer to inspect the property after an accepted offer and ask for any repairs or cancel the contract. If the buyer chooses to cancel during the inspection period for any reason, Earnest Money can be returned. Industry standard for the Inspection period is 10 days after contract acceptance, but can be negotiated. Appraisal Contingency is another cancelable item if the property does not appraise for the contract price. This is typical with a financing offer, but can also come into play for cash offers. If the property does not appraise, the buyer can choose to cancel, request the seller to come down to the appraised value, or meet in the middle during negotiations. If the buyer and seller do not come to an agreement, buyer can cancel and obtain their earnest money. Another common item is the financing contingency. If the buyers financing falls through prior to close, they can no longer move forward with the sale of the home, which is why receiving and verifying the prequalification letter prior to contract acceptance is so important. Other items such as the subject property being destroyed or heavily damaged prior to close. It is generally expected that the property is in relatively the same condition at close as it was during the showing that prompted the offer.
In a disagreement, there are mediation options and/or real estate attorneys that can assist with obtaining or keeping earnest money.