Every real estate transaction has a series of steps along the process to get buyer and seller together for a successful purchase. Articles have and will be written about each of these little steps along the way and earnest money is one of those steps that can seem like a strange practice to go through but makes sense when explained.
Made as a kind of good faith payment made by an interested buyer, earnest money is another of the small steps along the real estate process that deserves to be explored. While no real estate transaction is exactly like another, generally earnest money comes in as part of the process when an interested buyer signs over an amount of money (often in the neighborhood of $500 or $1000) to more or less express that they are serious about buying the home.
Where Does the Earnest Money Go?
Should the transaction go through, the earnest money is eventually taken off of the purchase price of your new home and if the seller decides to refuse the offer, the earnest money is returned. The only time the earnest money is lost to the buyer is when the buyer pulls out of the real estate transaction in a way that wasn’t defined before hand.
Stipulations can be put on any real estate purchase offer, such as making the offer contingent upon getting approved for a loan, and should the offer fail for those reasons, the earnest money would be returned. If a buyer just flat out pulls out of an offer, the earnest money is then carried over to the seller.
Those cases are generally rare as buyers that provide earnest money are indeed quite serious about buying the property. The amount of earnest money involved for your real estate is entirely up to the buyer and a Realtor can probably shed the best light on what is customary for that region. In most areas, $1,000 is a sufficient number but if you have heart set on some other number, a Realtor is obligated to take it to the seller for you. After all, the Realtor is working for you, not the other way around.
Earnest Money and Contingencies
To throw the contingency back on the seller, a buyer is perfectly allowed to set a contingency on the earnest money that says, for example, that the amount of earnest money on your real estate purchase will go up upon acceptance of the offer or some other seller-related action. In that kind of practice, the seller is rewarded for making a good faith effort to be serious about selling the home just as the buyer is offering a good faith effort to purchase the home.
If your Realtor asks you to make out the earnest money check to your real estate agency, it’s probably not because he’s trying to dupe you out of cash. Earnest money never goes directly to the seller and instead resides in an escrow account, sometimes held by your real estate agency, until closing. Several area title companies also offer escrow services so it is not uncommon to make your earnest money payment to the title agency handling your real estate transaction.
Earnest Money Communication
There are other little tips and tricks to help you remain secure in your earnest money offer, all of which can be handled by your realtor. Remember, this is your real estate purchase so make sure that you are comfortable with everything that goes on around the transaction. If you are not comfortable with the earnest money amount, say so. If you are not comfortable with the language included in the offer, say so.
Most real estate issues arise when poor communication is had between Realtor and client. Misunderstandings can arise simply because you did not ask your Realtor a question, so be sure to do your own due diligence and have a firm grasp of what is going on. Buying real estate is an important (earnest) event, make sure you know what is going on at all times.
Related resources for purchase offer fundamentals: Deal in Details | Home Buying Process | Home Buying Cycle | Home Buying Considerations | Purchase Offer Basics | Offer Price Influences | The Agent Derivative