How much earnest money should a seller request?
The amount of earnest money, also sometimes referred to as a good faith deposit, can vary depending on several factors, including local customs, market conditions, and the specific terms of the real estate transaction. Typically, earnest money is a percentage of the purchase price of the property and can range from 2% to 5% of the purchase price. However, it’s not set in stone, and both buyers and sellers can negotiate the amount.
In our for sale by owner transactions, when we represent sellers, we advise our sellers to request 5% earnest money deposit. This means that of the purchase price, 5% will be paid to escrow once we have a signed purchase and sale agreement in place. In the event the buyer backs out of the sale without legal recourse, the seller is able to keep the earnest money as liquidated damages for the buyer failing to proceed with the purchase. If the buyer does proceed with the purchase, then those funds are applied by escrow at closing towards the purchase of the home.
Here are some factors to consider when determining how much earnest money to offer:
- Local Market Conditions: In a competitive seller’s market where multiple buyers are vying for the same property, offering a larger earnest money deposit can make your offer more attractive to the seller.
- Seller’s Expectations: Some sellers may have specific expectations for the earnest money deposit. It’s a good idea to discuss this with the seller, their real estate agent, or their real estate attorney.
- Purchase Price: In general, a higher purchase price will result in a larger earnest money deposit. However, this isn’t a strict rule.
- Financing and Contingencies: Consider your financing situation and any contingencies in your offer. If you have a strong pre-approval for a mortgage and fewer contingencies, the seller may be more comfortable with a smaller earnest money deposit.
- Local Customs: In some areas, there may be customary amounts for earnest money deposits. Your real estate agent can provide guidance on what’s typical in your area.
- Negotiation: Ultimately, the amount of earnest money is negotiable between the buyer and seller. You can propose an amount that you’re comfortable with and adjust it through negotiations with the seller.
- State Laws: Some states have regulations governing the amount and handling of earnest money deposits. Be sure to check your local laws and regulations.
It’s important to note that earnest money is typically held in an escrow account and credited toward the purchase price at closing. If the deal falls through due to reasons specified in the contract (e.g., inspection contingencies or financing contingencies), the earnest money is usually returned to the buyer. However, if the buyer defaults on the contract without a valid reason, the seller may be entitled to keep the earnest money as compensation for the time the property was off the market.
Before making an earnest money deposit, consult with your real estate agent or attorney for guidance on what is appropriate for your specific situation and location.
If you are buying or selling a home and would like to do so as a for sale by owner transaction, give our office a call or text at (206) 408-8158, or visit us online at www.dallawfirm.com.
19803 1st Avenue S.
Normandy Park, WA 98148
T (206) 408-8158
F (206) 374-2810
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