Earnest Money – What You Need To Know

You include earnest money with an offer on a house to show the seller that you are serious about purchasing the house. It becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if you pull out of the deal for reasons other than those stipulated in the offer. A financing contingency is an example of the latter – if your offer was contingent on getting a loan, and you can’t, you can cancel the contract and get your earnest money deposit back.

How Much Earnest Money?

The size of the earnest money deposit is up to you.You can write the offer with a thousand pesos deposit if you wish, and the agent still has to present the offer.

As an agent, to protect the owner of the property, I would usually require 50,000 to 100,000 pesos earnest money. The earnest money can be part of a downpayment of the buyer if he then pursues the purchase of the property. The buyer will have to give an offer to the seller or an intent to buy with the earnest money.

You can also do a two-part deposit. You can make an offer with just 50,000 in earnest money, for example, but specify in the offer that this will be increased to 100,000 or more once the offer is accepted, or once when an inspection, appraisal or other contingency is met. This keeps your money from being tied up until you know that the seller is serious about selling to you. This will usually still be seen as a serious offer if the deposit is to be seriously increased at some point.

Who Gets The Earnest Money Deposit?

Never give your earnest money check to the seller. The last thing you want is a seller trying to keep your money after you pull out of a deal because of financing problems, termite infestations or other valid contingencies in your offer. If the real estate office handling the sale has an escrow account, it should be safe to make the check out to the broker. Always give your deposit to a third party to hold.

Ask how they handle it too. I once had an offer rejected and then had to wait a week to get my money back. They told me that they had to wait for my check to clear before they could issue a check back to me. I prefer it when it is handled like it was on our recent home purchase. They just hold the check until the offer is accepted, and return or destroy it if the offer is rejected.

How To Protect Yourself

Things can happen, right? If you pull out of the deal for some unforeseen reason – one not included in the contract – you’ll lose your deposit. However, the seller could also sue you for additional damages or even force you to buy the home. To protect yourself, have a clause in the offer that specifies the earnest money as “liquidated damages” if you are in default. The real estate agent can help with the language, but this basically means that if you need to default on the contract, the seller can’t ask for more than what you have already included as earnest money.

If you are a real estate agent dealing with a brokerage sale. It is a good practice to help protect the seller and the buyer through earnest money. It is like a reservation fee (if that would make it easier to comprehend) for brokerage listings where a buyer wants the property reserved to them for a period of time, with the intent to buy. This will help the seller be confident to deal with the buyer and a strong indication for buyers that they are serious with their intent.

If they decide to continue the purchase of the property, it will be part of the full payment of the said property. However, if they choose to withdraw, depending on the clause and duration stated in the contract, you may not be able to get the earnest money anymore.