Understanding Earnest Money
Make sure you fully grasp what an earnest-money deposit is—namely, proof that a buyer is committed to completing a sale by having skin in the game. The earnest-money deposit is a negotiable amount between the buyer and seller, but usually about 1% to 2% of the purchase price (although it can shoot up to 10%). This money is generally held by the seller's broker or a title company, to be used as a credit toward the down payment and closing costs.
In an aggressive seller's market, many homes receive multiple offers from anxious buyers. One of the ways to make an offer stand out is to offer a considerable earnest money deposit. If a high earnest-money deposit scares you, remember you'll have to come up with the down payment 30 to 45 days after making an offer, anyway. For example, on a $500,000 mortgage, a 15% down payment is $75,000.
One mistake buyers make with their earnest-money deposit is agreeing to remove contingencies they may legitimately need. For instance, if buyers agree to remove a loan contingency and their loan falls through, they'll lose their earnest money. Other contingencies, such as a home that's uninsurable, inspection issues, a problematic title search, or if a house doesn't appraise—also protect a buyer by allowing the penalty-free canceling of a contract. Make sure you are aware of all deadlines and contract requirements and stay on top of the timeline for completion or termination of the contract for valid reasons.
This may seem like a no-brainer, but it's easy to get swept away by a home's cool features when you first see it. Also, in a rapid paced market, you can become overly anxious about buying. A buyer may put in an offer only to realize days later that granite counters and stainless appliances are incredible but the overall floor plan just doesn’t work for your needs. Make sure that you're 100% serious about buying a home before making an offer. If you get cold feet and back out, it's likely that you won't get your money back.
Know when to let it go. I have worked with clients who have had major life changes during the midst of purchasing a home. Unless you are working with an extremely understanding seller, they will most likely expect to keep the earnest money deposit. After all, they have taken their property off the market in order for you to proceed with the purchase. There will also be other expenses that would normally be paid at closing that your deposit will need to cover.
Personal problems may be very serious to you, but they're not a valid reason to cancel a home purchase. And if you're bailing on a deal with no legal justification, fighting for your earnest money deposit is probably a waste of time.
Michael Elliott has been selling real estate at the Lake of the Ozarks since 1981. He is one of the most respected brokers in the area. If you have interest in a career in real estate or would like Michael’s assistance in the sale or purchase of property, you can reach him at 573.365.SOLD or firstname.lastname@example.org View thousands of lake area listings at www.YourLake.com $1 million plus homes at www.LakeMansions.com You can also view each months’ article, ask questions and offer your opinion on Michael’s real estate blog, www.AsTheLakeChurns.com