The earnest money deposit – this is the cash a buyer offers to essentially ensure no one else can buy the property. This deposit is widely misunderstood, and is an extremely important part of the home-buying process.
In most parts of the country you can expect anywhere from 1% of the purchase price to 10% of the purchase price to be required as an Earnest Money Deposit or EMD by the seller in order to remove the property from the market as contingent. In our area here along the gulf coast I see standard as $1,000 if you are getting financing and 10% if you are paying cash…..but the is extremely negotiable so it can vary. If a property becomes highly competitive a higher EMD is more attractive to the seller. This deposit tells the seller you are serious. If it was not required you could essentially put 5 houses under contract until you figured out the one you liked and then cancel the other contracts. This would of course cost the seller marketing time and potential other buyers.
I hear the worry already, but the seller is running off to Jamaica, (or as I write this I am literally 75 yards from Harrah’s Casino in New Orleans)……They are not heading there either. This money remains in an escrow account or with a title company until the sale closes. Now when everything goes as planned this money is put towards your down payment or closing costs at the closing of the transaction. What is there to lose???
NOTHING EXCEPT……..there are some scenarios where the closing does not occur and this money to buy the Pensacola real estate will be forfeited to the seller…….then they could use it at the casino
- You waived your contingencies.
So we found the PERFECT property. Proper amount of bedrooms….the yard is awesome and did you see that master bathroom. The problem is there are already 2 offers on the property, but we WANT it. To make your offer more attractive to the seller you waive all contingencies and put up 10% of the purchase price in EMD. You very well could lose that money.
The financing contingency guarantees that you will get your money back if for some reason your mortgage can’t go through and you’re unable to purchase the house.
The inspection contingency allows you to renegotiate the price or demand repairs if serious defect are found during the inspection. Or you have a reason to back out of the contract and have your EMD returned.
I am not saying that there are times when I personally have waived these contingencies. I am just stating the information so that as a buyer you know the risk of waiving these. If you waive all contingencies and you do not close FOR ANY REASON. The money you have put down as an EMD is gone!
- You ignored the timeline outlined in the contract
Both the Florida and Alabama state contracts spell out a timeframe for you to complete aspects of the contingencies. For instance most contracts state that the inspection contingency will be done somewhere between 5 and 15 days (these are calendar days) from the time that all parties have signed the contract. Again this is negotiable, but going longer will make you offer less enticing to the seller.
The Florida contract defaults to 30 days for financing to ensure a buyer has time to get financing, but this is a negotiable point. Again most sellers are willing to work with buyers, if a “good faith” effort is made, but understand the risk that you as a buyer are placing if the seller is not willing to extend, and you cannot obtain financing…….POOF EMD is gone
- You get cold feet
Remember earlier in the article I talked about a buyer putting multiple offers in with nor consequences? Here the seller views as the same. If you have a change of heart about the property you are buying – but there’s nothing wrong with the property or the financing, you are probably going to see your money vanish.
Remember what the purpose of the EMD is for. You as a buyer are instructing the seller to remove the property from the market and stop having potential buyers look at the property and potentially make an offer. If a buyer can do this and then just walk away with no consequence then what is the point? This deposit serves as protection for the seller that if you as a buyer walk away they will have some financial payoff for ignoring the other potential buyers.
When it comes to real estate, a case of buyer’s remorse could be even more painful than a lost deposit. I would suggest ensuring the property really is “the one” to try to avoid both