Earnest Money…The What, When & Why's

100-dollar-billLately I’ve been helping a lot of first time homebuyers purchase their dream homes.   In almost every instance there are questions along the way about some aspect of the Earnest Money process – so here are some of the most asked questions – and their answers:

1.  What is Earnest Money?

The simple answer is  – this is money the buyer puts up (most often into the Trust Account of their Real Estate Broker) to show the seller they are “Earnest” in purchasing their home, land or business.

2.  How much Earnest Money is usual and normal?

The amount varies around the country – I’ve heard of it being as much at 10% of the offer price in some parts of the country.  Here in Western Michigan the custom is that the earnest money is around 1% of the offer price.    On foreclosed properties the bank might have a set amount they MUST have and in some cases it becomes non-refundable after inspections.

If there are multiple offers it’s always a good idea to consult with your agent to see if perhaps having a large earnest money check might give you a bit of an edge, especially if the offers are similar. (I recall an old time Realtor  – every time he presented an offer to his sellers he would lick the earnest money check and stick it on his forehead – where it would stay during the entire presentation – just so they could “see” the money).

3.  Do I get it back?

Most often the answer is YES.  The earnest money and its disposition are addressed in your purchase agreement.  Typically the money is refundable if any of the contingencies in the offer are not met.  These contingencies can consist of:  financing, inspections, other zoning or legal matters – all must be addressed in the purchase agreement.   If all contingencies have been met and you walk away – then there is a good chance you do not get the money back (after all the money is to show you are earnest in buying the home).

4.  Who holds the Money?

All states vary a bit – here in Michigan the Earnest Money is deposited into the Trust Account of the Real Estate Brokerage you are working with.  In some instances the Title Company will hold the check (new condominium project, bank owned properties) in their Trust Account.  There are very strict rules about broker’s trust accounts – there can be no co-mingling of funds with the broker’s other accounts.

5.  When do I see my money again?

At Close!   Typically the Title Company will use the earnest money as a credit to you at the close.  In a foreclosure or a bank owned close, the agent might be bringing the earnest money check to the closing for you – to use as a credit for you.

6.  Do I need a certified check or money order?

In Michigan, for a normal sale the answer is – No – your own personal check will do (but a certified or money order will always work).  Many banks insist on certified funds for their earnest deposits on foreclosed properties.  If you only have cash, a real estate office is usually not equipped to take in a lot of cash – especially on a weekend, so a money order would be a good alternative.

Any comments – questions – suggestions – or good Earnest Money stories are welcome!