Today I’d like to discuss an important aspect of any real estate transaction: earnest money.
Before we go more in-depth, allow me to remind you of what earnest money is. Earnest money is simply the good faith deposit homebuyers make when submitting an offer on a listing. This deposit is meant to demonstrate your seriousness as a buyer and your financial credibility to the listing agent and the seller.
Of course, beyond symbolizing your intentions as a buyer, this money also serves a practical function. It doesn’t simply disappear. If the transaction proceeds, the money will be applied toward your down payment or closing costs. And if you walk away from the deal due to something like a contingency issue, the earnest money will be refunded back to you.
However, there are circumstances where your deposit won’t be returned to you. If you back out of the deal in a breach of contract, you will likely lose your earnest money for good. Another possible outcome of this situation may be legal action.
This brings to mind the question: How much do you want to risk?
According to the standard purchase agreement for Washington State, only amounts up to 5% of the purchase price are eligible to act as the remedy to forfeiture of earnest funds. In the example of a $300,000 listing, 5% of the purchase price would equate to $15,000. Therefore, if you put down $20,000 in earnest money, only $15,000 of that is ever at-risk of being nonrefundable.
With all of this in mind, we can at last discuss one final, but important, question: How much is the right amount to put down?
Well, anywhere between $500 to 10% of the purchase price is an appropriate amount. Deciding where in that range to place your own earnest deposit will depend on certain factors of your specific transaction. The purchase price, the level of competition, and your commitment to the deal will all play a role in this decision.
To better understand how these elements may factor into a real transaction, let’s imagine the following example. Let’s say you are looking for a home in Pierce County at the highly competitive $250,000 price point. In this situation, you should probably put down a full 1% of the purchase price when making your earnest deposit. This will likely put you in decent standing for having your offer accepted, assuming the rest of your terms are agreeable. An earnest money deposit of 1% will also be required in the case of most new construction purchases.
On the other hand, buyers looking for homes in Pierce County around the $375,000 price point will not face as much competition. So, in this case, a $1,500 earnest money deposit will probably do the trick.
As yet another example, let’s consider what kind of earnest deposit a buyer might need to make on a $325,000 home with multiple offers in South King County. Buyers in this situation should consider putting down 5%, or even 10%, in earnest money.
Ultimately, the right amount of earnest money to put down will depend on your specific circumstances. The key is that you and your agent discuss the amount, because this isn’t a throwaway term. It is a significant point in your contract that should be considered carefully before you proceed with a decision.
If you have any other questions or would like more information, feel free to give me a call or send me an email. I look forward to hearing from you soon.