Earnest Money

To begin, lets correct a common misunderstanding, earnest money is not the same thing as your down payment for your home loan, however it will eventually become a part of your down payment at the time of closing when your earnest money is credited back to you or if a true cash offer, it will be a part of the purchase price (sales price - earnest money = amount due at closing).   

When your offer gets accepted by a seller, the earnest money will usually be due in 2 days and should be in funds readily available when making an offer. What I mean by this is that your earnest money shouldn’t be waiting as stocks, bonds or in a foreign bank account. You should be able to write a check for your earnest money when making an offer. When the time comes the earnest money is delivered to your real estate agent or their office. During closing period your earnest money is typically, either held in a trust account or in escrow until closing. The best way is to get a cashier check from your bank as personal checks take longer to clear and are known to slow things down at times.

Earnest money is used for two things. It is paid to show you are serious about the purchase, and the higher the amount the bigger the sting if you had to walk away from it. For most of us, it’s easier to leave $10K behind that $50K, do you agree? That being said, usually the higher the earnest money, the stronger your offer.

What’s in it for the buyer then? Is it all to woo the seller? Mostly for the seller but it’s also a tool to negotiate if one side fails to preform and backs out before closing. If the buyer gets cold feet, if the buyers lender pulls out, if the buyer is… yes, the buyer. Always the buyer. However, instead of the seller making demands for your boat, your car or your first-born child, the seller is limited to the earnest money paid to cover for the damages and loss of money due to the buyer calling it quits prior to closing. So, prior to signing a contract make sure the right box is checked on your purchase and sale for default; forfeiture of earnest money. Otherwise you may end up discussing giving your dog to a seller that really likes your chihuahua.

Every now and then we see earnest money being released to the seller right away instead of being held either in escrow or in a trust account. It can make your offer look extremely appealing, but it does not come without questions. The problem of releasing earnest money to the seller prior to closing is the situation where the seller fails to perform and decides not to sell after all. Now the seller has your earnest money, all you have is their good faith to get it back. Yes, you can go to court for it, but that’s a lengthy and costly process and you still may end up empty handed. Is it fair? Most definitely not. However, life isn’t always fair.

In Washington state the amount of earnest money can be anything between 1% to 5% to be called earnest money. Anything over 5% would most likely not stand in court when talking about liquidated damages and may need to be returned to the buyer in case the buyer would breach the contract. The purpose of earnest money is not to be a punishment or a penalty in case the sale falls through, but rather cover for damages and time lost for the seller. Calling it a nonrefundable deposit, won’t change the thing that in a court of law anything above 5% may be deemed unreasonable, and a penalty. We don’t do penalties when it comes to earnest money in real estate.

Earnest: resulting from or showing sincere and intense conviction.

Earnest Money: money paid to confirm a contract.