Dealing With Earnest Money
My question involves the concept of giving an earnest money deposit. I have the downloaded contract from the site that asks for amount of earnest money offered and my questions are:
1) Is earnest money necessary?
2) How much should I offer?($1, $10,$100)
3) Do you give the money directly to seller or place in escrow account?
Thanks for the advice-
1) Earnest money is your good faith that you are going to uy the property.
2) around $500. to $1,000. is a good start
3) Open an escrow account.
wmwealth,
Well, I was waiting to see if someone else would address your question, as I am still new at this, but...
Is it necessary, I think it depends on who you are dealing with and what kind of time frame to close the deal.
If you have made an offer and can make
arrangements to close tomorrow, I dont see that it has any significance to a seller, although it may be considered customary to show some monitary consideration.
If you were making an offer to purchase from a lender or a seller that was taking bids from out of state, I would think that you would include some reasonable escrow deposit to show your seriousness. And make it part of the package.
Have you been asked for a deposit? I usually wait to be asked for one depending on the circumstances or the speed at which I have to move to try and lock-up the deal..
You would be working with a title company right..? They should be able to assist with an escrow account for your security. You are in a small area. Establish a relationship with 1 company.
But like I said I'm new at this.....
SG
Thanks , I was kind of going on the premise of dealing with the issue on a case by case basis like you suggest- If they ask then I will give some good faith money, but if my buyer is going to close quick with a cash purchase then I guess earnest money is not necessary.
At the end of closing does the seller receive the earnest money placed in escrow or is it just there for good faith.
I have an escrow account with the title company and use the same account for all offers. Most sellers want at least $1,000.00 earnest money.
Consider it another form of Leverage when you are buying. It might influence the deal.
Not really related but Another example: I have seen where a Seller took a solid convention loan buyer at a lower price instead of an FHA loan buyer at a higher price.
A smart seller will consider all aspects of the deal, just like a smart buyer, before making full commitment and sitting down at the closing table.
I wasnt suggesting that you shouldnt try to get a Deposit from your buyer.
The Deposit would be applied to "amounts paid by or in behalf of borrower" and reduces your down payment. And simultaneously is applied and reduces the amount due to the seller at closing. I think....
SG
Thanks guys-
Michael You said that you have an escrow account with $1,000 in it, what happens to that money after closing? does it go to seller or is it just "good faith money" that stays in the account. I just want to understand how it comes in to play during closing.
Thanks again for the replies, they are all very helpful.
Unless it is an MLS deal, attorney desl or highly competitive, I usually just say $100 for earnest on the P&S contract. Most times I do not put the money with a title company. Realize that this may not be kosher.
Brenda
It's typically $1000 here, I suppose it could probably be negotiated down, but how serious would I look if I quibbled over something like that.
I did the same as Michael, just told them to keep it for future deals so we didn't have to keep redoing the same ole thing.
Mykle
I offer $100 to be held in escrow by the closing attorney.
Of course this is private sales, with a Realtor its $500 until closing.
Best of Luck
JohnNH
Quote:1) Is earnest money necessary?No, earnest money is not necessary. However, it may be expected if offering earnest money is the normal practice in your area. In a private sale between the seller and a buyer (without real estate agents involved), the question of an earnest money deposit will likely never come up.
Quote:2) How much should I offer?($1, $10,$100)You can offer any amount the seller will accept. If the seller does not like the amount you choose to offer, the seller will counteroffer for a higher amount. Real estate agents will tell you that there is a minimum required amount, but this is not really law. The real estate agent's broker has set a required minimum for each contract his agents write.
Quote:3) Do you give the money directly to seller or place in escrow account?You should never give earnest money directly to a seller, but instead designate your own escrow agent.
I have been waiting for someone from California to respond. Although, I have been a full-time investor since 1988, it has always been my understanding that along with a contract consideration also had to be given (at last $1). Have I been wrong :-?
1) In my view, yes.
2) Market standard: In my market it's $1,000 with the offer and 10% of the pruchase price (less the aforementioned $1,000) to bind the Purchase & Sale agreement.
It is sometimes a wise move to exceed the area standard to show the seller you are serious.
3) Never give money directly to the seller. 3rd party escrow agent such as
1) In my view, yes.
2) Market standard: In my market it's $1,000 with the offer and 10% of the pruchase price (less the aforementioned $1,000) to bind the Purchase & Sale agreement.
It is sometimes a wise move to exceed the area standard to show the seller you are serious.
3) Never give money directly to the seller. 3rd party escrow agent such as
oops. continuing...
...such as the broker, closing attorney or in your state, the title company.
Lastly, the escrow funds role into your downpayment, closing costs, prepaid expenses or some combination thereof. If there is no such need, your deposit (or remaining portion) will be returned to you (at closing).
Quote:... it has always been my understanding that along with a contract consideration also had to be given (at last $1). Have I been wrong :-? You are not wrong. Consideration given is an essential element of a valid contract.
When you and I enter into a contract whereby you sell your house to me for a certain price, the price I agree to pay is the consideration I am giving you while the property you are selling is the consideration you are giving me.
However, an earnest money deposit is not required to "bind" a contract. As a show of good faith in asking you to take your property off the market and cease marketing for sale until we go to settlement, you may ask for an earnest money deposit or I may offer one. But, earnest money is not required. We have simply been "trained" by the real estate sales industry to believe that it is.
As a seller you are free to accept an offer with no earnest money involved, or you may counteroffer with a demand for an earnest money deposit.
Great information thanks to all who posted here!