In many ways, earnest money can be considered a deposit on a home, an escrow deposit, or good faith money.
An EMD or Earnest Money Deposit is a deposit made to seller that represents a buyer’s good faith when buying a home.
The earnest money deposit gives the buyer extra time to secure financing and conduct the title search, property appraisal, and inspections before closing.
The amount of the EMD is up to the buyer. Normal EMD amounts are around 1% or 2%, but in particularly good markets, the EMD can be as high as 5% to 10%.
Why Is An EMD Important?
The earnest money deposit ensures that the buyer is serious about the purchase of a property and not “SHOPPING AROUND” while taking properties off the market. The EMD will be credited on the closing statements.
Sellers should look at the EMD as the strength indicator in the offer.
For example, if someone offers $500 EMD on a $500,000 home, the seller will feel as though the buyer is not serious. The seller may also feel it is not an amount worth taking the house off the market for.
If a small EMD is part of the purchase agreement, you will want to investigate further with the mortgage lender and if cash deal, proof of funds.
When there are multiple offers, every detail is important, including the amount of EMD placed to secure the property. You want to make the listing agent and seller see your deal as the best opportunity to get to the closing table.
Who Holds The EMD?
The EMD will be placed with a broker, a title company, or a lawyer to hold while the real estate transaction is processing.
The escrow holder will vary, depending on the instructions for sale or the negotiated place between buyer and the seller.
The buyer can be granted EMD back if situations like the following occur:
At times, the seller will negotiate or work out the issues with the inspection, but when both sides cannot agree, the EMD can be released back to buyer and deal mutually released.
Property Does Not Appraise
Markets change and properties may not appraise for the agreed upon price. Like the inspection, if both sides cannot come to terms, the EMD is released back to buyer and deal mutually released
Misrepresentation By The Seller
The property should have a seller disclosure, 100% completed by the seller. If there is something that is misrepresented, on purpose or by accident, the parties can find a way to fix the situation or mutually release property and EMD returned to the buyer.
Mortgage Cannot Be Approved
Approvals are not guaranteeing that the deal will close. There are many other factors that come into play after the purchase agreement is signed and the deal processes. If the lender ends up stating the buyer cannot continue, the EMD is returned and property mutually released.
In the case where the EMD is being disputed, you will need to review the purchase agreement to decide how to proceed – some purchase agreements have built in mediation or arbitration clauses.
You can contact the other broker, use the local real estate board, or in extreme situations, you may need to use an attorney to get the EMD released.
Both the buyer and the seller can try to claim the EMD. Therefore, having contingencies in the purchase agreement and everything in writing as the real estate deal progresses. Besides everything in writing, you will want to make sure all parties sign any changes or addendums.
Here are some situations where the seller has the right to request the EMD be provided to them:
Buyer Gets Cold Feet And Wants Out
Just because the buyer gets cold feet or decides the home is not what they wanted; does not mean they get their EMD back. The seller has taken the home off the market and accepted the EMD as good faith that the buyer wanted the home.
Both the buyer and seller will need to review the PA for deadlines agreed upon. If the buyer fails to perform, the seller is entitled to the PA.
Buyer Cannot Perform Or Close By A Specific Date
If the buyer cannot perform by the contract date, the seller can request the EMD be sent them.
Buyer Did Not Provide Accurate Information
When the buyer provides documentation to the lender, and it is later found out to be untruthful and the mortgage declined, this is not the same as being denied the loan.
These are just a handful of reasons as to why a seller may have rights to the EMD. Both the buyers Realtor and Listing Realtor should have protections in place for their client.
Besides everything in writing, you will want to make sure all parties sign any changes or addendums.
Writing up a purchase agreement has more than a price to offer a seller. Realtors are professionals at making sure your offer is written to secure your interests and protect you.
Listen to the Realtors advice when they are working on your deal. They do this every day. Although, the Realtor does work for you, and in the end will submit the offer how you feel comfortable, they are the best resource for making deals happen.