What the heck is Earnest Money? (Seattle Real Estate Version)

Earnest Money

First time home buyers  ask what earnest money is.  Money that accompanies the purchase agreement to show that the buyer is serious about buying the property, sometimes called a deposit.   These funds are not in addition to the purchase price, they end up being put toward the purchase.

Buyers can lose their earnest money by backing out of the deal after the purchase agreement has been accepted by both parties.

I have received earnest money checks that have bounced.  Even though the money is not spent until the closing state law says that they have to go into a real estate brokers trust account with in three business days.  Earnest money checks are getting smaller all the time.  $500.00? you have got to be kidding, how serious are you about purchasing this home?   I like to see a check for 1% of the purchase price.  I have gotten checks for 20% of the purchase price, most buyers do not have that much cash.  Locally first time home buyers can usually get by with between one and two thousand dollars.

Sellers can and sometimes do counter an offer and ask for more earnest money.  No one wants to have their home sold, take it off the market and have the buyer back out before the closing, yet it happens. Sellers want to make sure the buyer is committed. A $5000 dollar commitment is stronger than a $500 dollars commitment.

What the heck is earnest money? In Seattle’s real estate market today, this question pops up during pretty much every transaction. Even if the buyer or seller have bought or sold in the past, most people forget exactly what it is and why it is used. Teresa Boardman, a great real estate agent in St. Paul, Minnesota, explained it so well above.

Buyers generally try to use the lowest amount of earnest money possible. I see it all of the time. Since I am all about getting you the best deal possible, I’m right with you. What I have found is the amount of earnest money you can expect to put down depends on who the seller is. If the seller is a bank and there are not multiple offer (believe it or not, a lot of bank owned homes in the city of Seattle are getting multiple offers in today’s market), you can usually get away with using somewhere between $1500-$2500 (on a purchase below $500,000). That is less than 0.5% of the purchase price. If it is a multiple offer situation (bank owned or not), this number usually increases. The reason why is because if you really want the house, and there are multiple people bidding for it (again, in Seattle, I am still seeing multiple offers on some of the good deals I find), you want to make your offer seem the strongest you can. One of the many ways to do that is to increase your earnest money. Since earnest money is used towards your down payment, it’s not like its money you wouldn’t already be spending. You’re just depositing it earlier than you would if it was going to be used as a down payment (down payment money isn’t deposited until your signing appointment, which in the Seattle area is generally 2-4 days prior to your closing date).

One other technique I use when representing buyers is the deferred deposit of earnest money clause. This is a clause that was in our NWMLS forms when I first started in the business in 2005, but was taken out because many agents abused it (an earnest money check is needed from a buyer the day they write their offer – many agents were waiting to collect the check for days). Why is deferred deposit of earnest money so cool? Well, I think it’s cool because it allows you to not have your earnest money check deposited until AFTER you have waived your inspection. In today’s market in Seattle, an inspection period is generally the first 5-10 days after mutual acceptance (meaning the first 5-10 days after both the buyer and seller agree on all of the terms of the contract). By using deferred deposit of earnest money, if you find something major wrong with the house during the inspection period, you can back out and get your earnest money check back before it was cashed (and without going through the hassle of having that money cashed and not accessible to you for days while the escrow company cuts you a new check and mails it back to you).

So that’s what earnest money is, and how you can expect it to be used in Seattle’s real estate market today. If you ever have any questions about earnest money or anything else dealing with today’s real estate market in Seattle, feel free to ask me. I’m always here to help!