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Real Estate Earnest Money Basics

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Individual state laws and real estate regulations govern the use of earnest money in real estate transactions. All involved in a real estate transaction should be familiar with their state's rules regarding the handling of earnest money, particularly in the failed transaction with a dispute.

In a thesaurus, a synonym for earnest is sincere. When purchasing real property, the buyer offers a sum of deposited money to be held to indicate their sincerity and intent to go through with the purchase process. The amount offered usually correlates somewhat with the purchase price of the real property, however this can vary by locality and custom. The amount of earnest money is also normally a negotiable item. The seller does not have to accept the initial amount offered by the prospective buyer. Sellers can require an increase in earnest money deposited for various reasons:

  • Buyer has requested extended period to closing
  • Buyer is offering zero or very low down payment
  • Seller has increased interest or other offers on the property
  • Buyer just offered too little money in the first place
  • In some cases, sellers may set a minimum earnest money amount in the listing advertisement. New homebuilders may also have certain minimum up-front deposit requirements.

    Most states have very strict rules regarding the handling of, and accounting for, earnest money deposits. The money is usually held in an escrow company account, title company account, buyers' broker trust account, or sellers' broker trust account. It is always the buyer's money in a transaction that goes through to closing. On the settlement statement it is used to offset the buyers' costs in the transaction.

    The disposition of earnest money in a dispute and failed transaction is also spelled out in state law and real estate regulations. In many real estate contracts the buyer and seller agree to mediate before going to court and taking further legal action. Mediation usually results in agreement by the parties as to how to distribute earnest money in the failed deal. In many cases just avoiding the cost of mediation will result in an agreement between the parties. In all cases, real estate agents and brokers should place the highest priority on the handling of client funds.

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