As an Iowa Real Estate Attorney, I have come across many home buyers and sellers who are unsure about earnest money. It is a basic concept that can have significant implications for both the buyer and the seller. Let’s take a look into what earnest money is, how it works, and what you need to know about it.
What is Earnest Money?
A deposit made by the buyer to show their good faith in buying the home. This money is held in an escrow account by a real estate broker or settlement agent until the closing date. It provides the buyer with additional time to perform a title search, property appraisal, and home inspection before closing. It also gives the seller the assurance that the buyer is serious about buying the home.
How to Pay?
Earnest money is usually paid by certified check, personal check, or a wire transfer into an escrow account. The deposit is made when the home sales contract or purchase agreement is signed. However, in some cases, a check can accompany the offer.
What is the Appropriate Amount?
The amount of money that a buyer offers depends on the market and the condition of the house. The parties are free to negotiate the amount, but typically it’s between 0.5% and 1% of the home’s purchase price. The deposit can also be a fixed dollar amount, such as $1,000.
When Can Seller or Buyer Keep the Earnest Money?
There are certain situations where a buyer may not have to forfeit their earnest money if the transaction goes awry. A buyer is able to have it refunded if they withdraw from a contract due to a contingency. These contingencies must be part of the sales agreement. Some of the common types of contingencies include:
- a home inspection contingency
- an appraisal contingency
- a financing contingency
- a title contingency
- a home sale contingency.
A buyer may also waive the contingencies to motivate the seller, but may unintentionally forfeit their earnest money if the transaction is not completed. On the other hand, there are some situations where the seller is entitled to keep the deposit. These are usually situations not covered by the contingencies, or if the sale falls through altogether. The seller can keep the earnest money if the buyer breaks the terms of the purchase agreement.
Takeaway
It’s essential to understand what earnest money is, how it works, and your rights and obligations in relation to it. Make sure your purchase agreement clearly reflects what amounts to canceling the sale and who is permitted to keep the deposit. If you have any questions or concerns, consult with our team at Danilson Law.
