Issue Date: March 1, 2006

Earnest Money Improves your Offer

By Jody Zink
Licensed Realtor in Ohio & Michigan

A potential homebuyer decides he wants to put an offer in. Together with his Realtor, they draw up an offer to purchase. It often happens while sitting around a conference table. Or gathered around the hood of your car. Or at a McDonald's. After determining a price to offer, with pen in hand, the Realtor asks the buyer if he'd like to put down earnest money.

Earnest money is offered as an indication of a buyer's seriousness and good faith for future performance. Without it, a seller could argue that he's the one taking more risk. When Buyer and Seller do reach an agreement, the home is taken off the market. If the transaction doesn't close, the seller loses that marketing time and potentially a better offer from someone else. It's true buyers pay for appraisals and inspections, but the deal doesn't always get that far. Earnest money shows that the buyer is willing to meet in the middle.

Typically, earnest money is not paid until buyer and seller reach an agreement. Then it goes into your broker's non-interest bearing trust account until closing. The seller or Title Company can also hold it.

Upon closing, the deposit is given back to the buyer, at which point he may use it towards a down payment or closing costs. That's the best-case scenario.

There is, of course, the possibility of losing the earnest money. If one side defaults or doesn't pursue the contract as promised, there can be controversy. Sometimes both buyer and seller believe they've honored all the terms of the contract and demand that the escrow agent, often the real estate broker, give them the money. The funds, however, cannot be released without either a court order or a written agreement from both sides---even if the broker believes that one side is entitled to the deposit.

An earnest money deposit is negotiable and legally you don't need to make any deposit with your home purchase offer. Few home sellers, however, will agree to sell unless the buyer makes a modest good faith deposit. Earnest money improves the offer. When making an offer that's substantially lower than the asking price, a large good faith earnest money deposit could potentially help convince the seller to accept.

So how much is enough? There really is no right or wrong answer here. It should be large enough to get attention, but not so large that you're placing significant funds at risk. 1% of the purchase price is a good rule of thumb. $1,000 is not uncommon. There may be a property that's especially desirable with multiple offers. A large deposit may impress a seller enough to accept your offer instead of someone else's---even if your unknown competitor is offering a slightly higher price. More money up front might save you money
later.

So when your Realtor asks you the earnest money question, consider it. Earnest money talks. The perception of seriousness and reduced financial risk can be just the push needed to get your lower offer accepted.

Jody Zink is a licensed REALTOR in Ohio and Michigan with the Loss Realty Group. Her column appears every other week in the Toledo Free Press. She can be reached at jody@jodyzinkrealtor.com or 419-725-1881.