What is it?

Earnest money is a topic that usually gets covered by a Realtor last minute before writing up an offer.  I hope that after reading my article, you will become an expert on earnest money. Earnest money, or EM for short, varies across different states so keep in mind that I am discussing EM in Georgia real estate transactions. EM is basically a buyer letting a seller know that they are interested and serious enough about buying the home that they are putting down money as ‘skin in the game’. An offer without EM is not a serious offer. If the buyer purchases the home the EM will go towards the purchase price of the property. If the buyer does not purchase the home they can get their EM back under certain situations such as terminating the contract during due diligence, the property or borrower failing to meet financing requirements, or seller’s failure to fulfill their contractual obligations.

How you can lose EM

EM can be forfeited in many ways. Sometimes deciding who keeps EM is pretty clear, other times it’s a gray area. If a buyer decides to terminate after due diligence for no reason such as property failing to appraise, or they failed to get loan approval, then could lose their EM. Failure to close on time is also a way one could forfeit their EM. For example, in one transaction where I represented the seller, the buyers switched lenders on us after we took the buyers offer on the assurance they would close in 30 days. My seller asked me to relist the property to accept a backup offer. We received a decent backup offer better than the original offer so I let the other agent know that if his buyers want the home they better close on time. Still there was no urgency on their side at all to close on time. Closing day rolls around and the other agent never sends over a unilateral notice to extend. I convinced my seller to give them until Monday to close. Tuesday arrives and the agent wouldn’t return my calls on when we could close. We decided to send over a termination and we requested to keep the buyer’s EM. The agent call’s me immediately asking if we will give them another week, we tell him sorry, but no. I hated that situation for the buyer’s sake. It wasn’t their fault that their agent didn’t communicate with me nor send the unilateral notice to extend closing. Lesson from this story is be wise on who you choose as your agent and also stick to the dates on the contract.

Who Holds my EM?

Earnest money is held by your agents’ brokerage or by the attorney. It must be held in an escrow account. If a dispute arises over who gets to keep EM, then the party holding the EM will review thecontract and decide who it’s released to. Sometimes an attorney has to get involved!

What amount of EM should I put down?

It depends on a couple of things such as, what kind of financing you are using, the price of the home, the environment of the market. Sometimes, a listing agent will tell their sellers to accept nothing less than 1% of sales price. I encourage my buyers to put down at least $1,000. If you are purchasing cash maybe you will put down more to show your seriousness. Maybe there are multiple offers so you put down a larger amount of EM so the seller knows they are taking their home off the market for a very serious buyer. In this matter it’s best to listen to your agents’ advice. It’s their job to help you get that home, so if they tell you to put down a certain amount it’s probably because it’s what you need to do to win the bid. Last year I worked with a man who I probably wrote 5 offers for. Every time we got to EM he only wanted to put down $50. That should have been my red flag and I should have told him immediately that I wouldn’t be able to help him find a home. Once I start working with someone though I don’t want to give up on them. After him losing out on 5 homes I think he started to blame me. The problem in fact was that at the time it was a sellers’ market and he was offering $20,000+ less than what asking price was on top of wanting all his closing cost paid for AND only willing to put down $50 in EM. I tried explaining to him multiple times that we couldn’t put only $50 down on a $200,000 home but he wouldn’t listen. In the end I wasted months of my time, energy and gas money showing him and his family homes. I think deep down the problem was he didn’t respect me as a professional, so I hope he was able to find another realtor who was able to talk some sense into him. The home buying process can be super stressful! Just remember though, your agent is on your side and it’s their job to make this process as simple as possible. Listen to their advice.

If you have any questions regarding earnest money, leave a comment! We would love to help you in all of your real estate needs!