Title Tip: Show Me The Earnest Money

By Lydia Blair
Special Contributor

When putting a contract on a property, a buyer can usually expect to write two checks to accompany their contract — an option fee check and an earnest money check. There is no strict rule about how much each of these checks must be. The amount of this up-front money is negotiable between buyer and seller. However, the amount sends a strong signal to either buyer or seller.

A buyer offering too little in either option or earnest money can indicate they are not serious or very interested in the property. Perhaps they can’t even afford it.  A demand of too much option or earnest money from the seller may send the message that they are unreasonable or mistrustful. The state of the real estate market also influences the amount of option fee and earnest money. 

The option money is a non-refundable fee that the buyer pays to the seller for the option to terminate the contract within a specific time period. This option period is when the buyer may perform inspections. And they have the right to back out of the contract for any reason before the option period ends. The option fee is typically anywhere between $100 and $1,000. How much really depends.

If it is a slow time of year or a buyer’s market, then the buyer may be able to negotiate a long option period (10-14 days) with a small option fee ($100-200). It it’s a fast moving, seller’s market or there are multiple offers, the option period may be three to five days with an option payment closer to $250-500. It’s actually a small price to pay considering that the seller is taking their property off the market and is locked into selling, while the buyer has the option to change their mind and walk away.

The other, much larger, check that the buyer will write is for the earnest money.

Earnest money is deposited by the buyer with an escrow agent and it is forfeited to the seller if the buyer defaults on the contract. These funds are delivered to the escrow agent after the contract is executed and before three business days are up.

Earnest money demonstrates that the buyer is acting in good faith with the intention of buying the property. The money is held by the title company. At closing, the earnest money is credited back to the buyer. If the contract terminates after the option period, the title company will either deliver it to the seller or return the money to the buyer, depending on why the contract terminated.

Earnest money is usually somewhere in the range of 1 percent to 2 percent of the contract sales price. An amount much lower or higher says a lot. Like the option fee, the amount of earnest money depends on several factors.  If the real estate market is slow or the seller isn’t getting any offers, you might pay less than 1 percent of the sales price in earnest money. In a busy market, where there is more demand for homes, you might have to make a bigger deposit than is typical.

On average, the earnest money deposits that I see in my Dallas office are 1 percent of the sales price. However, it’s been a busy spring, and right now that average is slightly higher. In the past month, I’ve seen earnest money range from $2,000 to more than $50,000. Eager buyers are often willing to put significant money down to show they’re serious. And sometimes the higher earnest money helps them win the contract in a multiple offer situation.

Understandably, sellers prefer to see their buyers make a substantial earnest money deposit. They want the amount to be large enough that the buyers will avoid defaulting. Sellers typically feel they are the ones shouldering the risk when they take their property off the market and trust that the buyer will be able to close. No one wants to spend weeks packing up their home and making moving arrangements only to have the deal fall through.

If you’re serious about buying a home and want to send the sellers that message, forget the personal notes and sentimental letters about how much you love their house. Show them the earnest money. Preferably a lot of it.

The opinions expressed are of the individual author for informational purposes only and not for the purpose of providing legal advice. Contact an attorney to obtain advice for any particular issue or problem.

 

One Comment