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Earnest Money 101

What is earnest money? Earnest money is the amount of money a buyer puts down to accompany an offer to purchase real estate. Basic contract law requires “consideration” as an element of a valid contract. The earnest money deposit is that consideration when a buyer makes an offer. It is used to show the seller that the buyer is “earnest” in his desire to purchase his property. Without earnest money deposits, buyers could make offers on multiple properties leaving the sellers with little recourse if the buyers back out of the contract. The amount of the earnest money deposit is negotiated between the buyer and the seller but is usually between 2 and 5% of the offered price. Who holds the earnest money is also negotiable, but in this area it is common practice for the listing office to hold the earnest money in their trust account. The escrow or trust account is a non interest bearing account where earnest money deposits are held until the property closes or the contract is terminated. At closing, the earnest money deposit becomes a credit to the buyer for any closing costs they may have, or it is subtracted from the purchase price of the property. This process sounds easy enough but what happens when the property doesn’t close? Who gets the earnest money then? That’s where things can get sticky. Earnest money is not like a security deposit. The buyer does not automatically get their money back if the property doesn’t close. The seller doesn’t automatically get to keep the money of the property doesn’t close either. How this situation gets...

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