Buyers want to show that their offer is made in “earnest”, so they submit their bid with money (a check). It's called a binder, a good faith deposit or earnest money deposit. It may or may not be that important, depending on the amount, the length of time until the closing, the purchase contract provisions and local laws.
Legally, earnest money does not belong to you, even if it’s given to you by the buyers. A third party such as an escrow agent, an attorney or a real estate agency should hold it. It is applied to the purchase price at closing.
Some buyers will stipulate in their offer that the earnest money will be presented when their inspection is completed. At this point they know if they'll feel comfortable about the inspection. This is a smart move on their part and one that isn't usually disputed by the sellers.
If the deal dies because a contingency cannot be met, the buyers almost always get their earnest money back.
The actual amount of earnest money is driven by local tradition. It can be as small as a few hundred dollars to as high as several percent on more pricey properties or in highly competitive situations. Around two percent is very common, and rarely does it go over ten percent. Local agents and attorneys can recommend what’s traditional.
Buyers may try to impress you with an excessive amount of earnest money during the negotiations. Large amounts are commonly used in multiple bid situations as hopeful buyers attempt to gain a favorable edge.
A large amount provides you with a nice feeling of security, but who has claim to it depends on how its disposition is spelled out in the contract.
The longer the time period until the closing, the more important the earnest money becomes. A sale that will close in three weeks is less risky than one that is scheduled to close in six months. Longer periods allow more time for something to go wrong (job loss, loss of financing, property damage, etc.).
When the sale dies:
In some states, the buyers can get their earnest money deposit back with relative ease if they legitimately fail to meet a contingency and the sale falls through. In these situations, the actual amount of earnest money is not that important.
If a sale falls apart because the buyers simply back out, you’ll make your best case for laying claim to the earnest money. Even then, you and the buyers undoubtedly have to sign off on this, otherwise court action may have to be undertaken to settle any disputes.
Until the earnest money issue is resolved, the buyers could still be considered to hold an “interest” in the property. This means that you could have some difficultly selling until this issue is put to rest - another reason for you to engage the services of an attorney.
As buyers become vested:
As contingencies are met, there is less risk of having to give the earnest money back to the buyers. Therefore, during negotiations, the seller might consider inserting (under legal guidance) a stipulation in the contract stating that when a specific situation is met, the earnest money will be increased to some agreed upon amount. Performing repairs agreed upon as a result of the inspection is an example.
This is usually only done if the initial amount was smaller than normal. It becomes less likely the buyers will try to back out if all contingencies are met and the earnest money amount is significant.
Take heart when buyers pay to make mortgage application, pay to have a home inspection and pay for an attorney. The more the buyers have invested financially in the transaction, the more committed they are for its completion.
Seller's earnest money:
Buyers can request that the seller puts up earnest money. Thus, if you don’t perform (as an example, move out as specified in the contract), then the buyers could lay claim to this earnest money. This is more common in major metropolitan areas where attorneys like to demonstrate to their buyer clients that they’re looking out for their best interests. Or to put it another way, where nobody trusts anybody.
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