During my 37 years as an Oceanside Real Estate Agent buyers commonly ask the same question, usually during the offer phase, “what is earnest money?”. Usually, that’s followed by “why do I need it, how much of it do I need, and can I lose it?”. I’ll answer all those questions for you now, because earnest money is a topic that one should have a bit of education on.
First, earnest money is basically a deposit. It is an amount that is put into escrow to show the seller that you mean to go through with the purchase. It’s used to demonstrate an intention to complete the transaction. This indicates to the seller that you not just submitting offers on multiple properties, nor are you going to just walk away from it. All of that adds up to an important piece of mind for the seller, especially when they are taking their home off the market for you.
Next is the question of how much do you need. Unfortunately, there’s no real easy way to answer that, except for “whatever it takes to let the seller know that you are serious”. Which boils down to the more the better. It’s really impossible to know ahead of time exactly how much earnest money you’re going to need, though generally, about 1% of the offer price is thought to be a good amount. Again, that’s just generally. Consider this: if a seller gets two offers that are identical in price, down payment, close of escrow, all that, EXCEPT for earnest money, then the seller will usually go with the one with the bigger earnest money amount. A higher earnest money amount will sway buyers from one offer over another even with lowered offer price and things like that, because it signifies that the buyer is much more likely to close the transaction.
You must remember that earnest money can be lost, though. If you default on the contract, the seller will retain the earnest money you put down. Now, if the seller defaults, if the seller doesn’t meet all of the requirements during the inspection or due diligence period, if the home doesn’t appraise for the asking price, things like this, then the earnest money goes back to the buyer. So if you put down earnest money, then don’t back out.
Earnest money is one of the stronger ways to show the seller you are serious about a purchase. If they accept your offer, then they are taking their largest asset, their home, off the market for you, so they need a little reassurance. It proves to them you are serious about purchasing their home, you can get a loan, and most importantly, you aren’t going to back out and leave them in a lurch.
Need help selling your home in this confusing market? Call Mindi Landry at 760-737-3767. She’s an Oceanside real estate agent with 37 years of experience, whose only job is to look after your best interests.