Protect Your Earnest Money Deposit When Buying a House

Protect your earnest money deposit when buying a house.
Protect your earnest money deposit when buying a house. | Source

Put Your Money Where Your Mouth Is

Money talks! When you buy a house, the earnest money deposit is a way for you to show good faith when making an offer to purchase a house. Putting money on the table is a smart move. It shows the seller how serious you are about your offer and your intension to complete your contractual obligations. An earnest money deposit is a commitment. It is consideration that goes toward the total funds offered to purchase the house.

But, let’s face it; life happens! Things change. Sometimes even the best intensions go awry. When this happens, you want to be able to get your earnest money deposit back.

The earnest money deposit is also known as the Good Faith Deposit.

California

In California, the earnest money deposit is normally placed immediately into an escrow account. Review your contract to see exactly what happens to your earnest money deposit.

Escrow

Escrow is where a neutral entity holds earnest money deposits and assures all parties complete their obligations in the transaction.

What is an Earnest Money Deposit?

Let’s consider the term, “Earnest Money Deposit”. The term itself is a clear description of your intensions. When you are earnest, it means that you are sincere and serious about your intentions to do something. A deposit is a portion of the total amount of money you pledge to do whatever you stated you would do.

When you pledge an earnest money deposit to a seller, your earnest money offer tells the seller that you intend to make every effort possible to purchase their house. Earnest money deposits are given to “seal the deal”, confirming the contract that you and the seller have mutually agreed upon.

Protecting Your Earnest Money Deposit

The first rule of protecting your earnest money deposit is to be absolutely sure you want to buy the house. If you have any hesitation at all, then by no means should you ever come out of pocket for an earnest money deposit.

Here are some ways you can protect your money:

  1. Do Not Offer an Earnest Money Deposit
    Make an offer that does not include an earnest money deposit. To be perfectly honest, it is highly unlikely that the seller would be willing to forego the earnest money deposit. Although unlikely, it is possible that the seller may accept your offer with particular circumstances. A desperate seller might be willing to accept any offer, regardless of the earnest money deposit. Most likely, an offer that does not include an earnest money deposit would require an extraordinary offer, an all cash offer, or a quick-closing escrow. Also, a seller might be willing to forego the earnest money deposit if you allow the seller to keep the house on the market so they can continue to attract other buyers until you have removed all contingencies and are at a point in the transaction where you are obligated to purchase the house under any circumstance.

    A purchase offer with no earnest money deposit is a difficult deal to sell to the seller. If you could get a deal like that it would be to your advantage, because with no money on the line, if you change your mind, or if something goes wrong, you would not have to go through the trouble of asking the seller to return your earnest money deposit.
  2. Request That the Earnest Money Deposit be Held With Someone You Trust
    Request that the earnest money be held with someone you know and trust, like an accountant who has no financial interest in the transaction or have your broker hold the money instead of the seller’s broker.

    When the earnest money deposit is held with someone you know and trust, should there be a need to request a return of your earnest money deposit, a person who knows you is less likely to hold up the return of your deposit unnecessarily.

    This may be agreeable to the seller, but only if the seller has trust in the person selected to hold the earnest money deposit.
  3. Put Up the Earnest Money Deposit in Stages
    Pledge to put up an ultimate amount for the earnest money deposit, but pledge to release incremental amounts of the money in stages. Ideally, you could make an initial deposit upon acceptance of the agreement to purchase the house. Then, at specific stages, deposit another portion of the earnest money deposit.

    Let’s say you wish to pledge a total earnest money deposit of $5,000. An example of how you would pay the deposits is:

    $1,000 at the acceptance of the agreement
    $2,000 when the buyer has completed all inspections
    $2,000 when the buyer obtains loan financing

    This is a reasonable deal to sell to the seller. As the terms of the contract are fulfilled, you would deposit more funds, making you more committed to the transaction. Should you need to request a return of your earnest money deposit prior to a particular stage, the entire amount of your money is not tied up.

Protect Your Earnest Money in the Contract

Make sure you are clear about what happens with your earnest money deposit right from the start. The purchase agreement states exactly what happens with your earnest money deposit. When constructing the terms of the earnest money deposit, make sure you are clear about the following things:

  • The amount of earnest money required
  • When the earnest money is due
  • Where the earnest money resides during escrow
  • What events allow you to request your earnest money to be returned
  • How much earnest money you can request to be returned
  • What the procedure is for requesting your earnest money to be returned

Maximum Allowable Earnest Money Deposit

Each state has its own law about the maximum allowable earnest money deposit that is protected in each transaction. For example, in California the Bureau of Real Estate indicates that the maximum allowable earnest money deposit that will be protected is 3% of the purchase price. In any transaction, the buyer can offer more than 3% of the purchase price as earnest money, however, only an amount up to 3% will be legally protected.

Protect Your Earnest Money Deposit Prior to Negotiations

In the ideal situation, your request for a return of your earnest money deposit will not be met with opposition. In the worst case, you will have to work a little harder to receive your earnest money deposit back.

While you may have completely adhered to the contract and are completely within your right to request the earnest money deposit to be returned, the seller may try to withhold the return of the deposit by not acknowledging your request. In this case, depending on the terms of your agreement, you may have to go to mediation, arbitration, or court to have your earnest money deposit returned to you.

Your best chance of receiving your earnest money deposit back is to protect your money prior to negotiations to purchase a house.

Earnest Money Deposit Video

When Does My Earnest Money Deposit Become Non-Refundable?

When considering earnest money deposits, time is of the essence. You must act in a timely manner to make sure you are able to receive your earnest money deposit, should you wish to receive it back. Your contract clearly outlines specific timelines and incidents in which you can request your earnest money deposit back. Read your contract to be sure you understand and agree to the time lines and incidences surrounding the holding and releasing of your earnest money deposit.

Watch this video for some helpful tips about earnest money deposits and when they become non-refundable.

Beware of Sellers Requesting Sizeable Earnest Money Deposits

Be leery of sellers asking buyers to deposit earnest money deposits greater than the maximum allowable amount protected by law. These sellers know that any money deposited above 3% (in California) is money that the seller has an opportunity to argue in favor of keeping for whatever their reason. Usually, the reason is that the money is unprotected by law or the purchase agreement.

"Real estate made easy!"

Marlene Bertrand is a Broker/REALTOR®.
Calif. Bureau of Real Estate Lic. #01056418.

© 2013 Marlene Bertrand

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12 comments

MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello DDE. Indeed, the buying process does have enough problems without the additional worry of what happens with your money. Thank you for your positive feedback.


DDE profile image

DDE 3 years ago from Dubrovnik, Croatia

Protect Your Earnest Money Deposit When Buying a House, informative useful and so well researched, buying a house is a tough decision and spending is another problem, sound advise here.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello Benjamin Chege. It's unfortunate, but a lot can go wrong in a real estate transaction. No one wants to lose money, so for me, protecting it is the number one objective.


Benjamin Chege 3 years ago

Hi MarleneB. Great ways of protecting oneself from dishonest real estate dealers. Votes up and useful.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Thank you for your comments, Writer Fox. Yes, you are so right. Every state is different. Even here in California, different counties do things differently. So, that's why it is so important to know ahead of time, what happens with the earnest money deposit.


Writer Fox profile image

Writer Fox 3 years ago from the wadi near the little river

Every state has different laws and customs regarding earnest money. In Texas, for example, the deposit is held by a title insurance company and is only released if both buyer and seller agree. Sometimes, unfortunately, both parties to the transaction do not agree! Enjoyed the advice you give here.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi MsDora, thank you for reading and leaving your valuable comment. When it comes to money, everything is important.


MsDora profile image

MsDora 3 years ago from The Caribbean

Really good advice, Marlene. I know from experience that there could be some unpleasant surprises, if things do not follw through as planned. Very helpful!


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi Ericdierker! Thank you for your positive feedback. I'm fine-tuning a niche here, so your comments are very encouraging - letting me know I'm on the right track.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Thank you, Bill. You give the best advice. I'm taking it all in. I finally narrowed down my niche to ONE topic - real estate. It's what I know best. Your advice about keeping it simple is what I'm shooting for. I'm keeping my first-time buyers in mind when I write. Also, thank you for the tagline idea. I like that idea a lot. You're the best!


Ericdierker profile image

Ericdierker 3 years ago from Spring Valley, CA. U.S.A.

Good stuff. And transferable knowledge for many types of transactions. That deposit/earnest money helps keep things moving in our world. It needs good solid advice like this to keep it right.

Thanks


billybuc profile image

billybuc 3 years ago from Olympia, WA

That's what I'm talking about, Marlene. Simple, straightforward advice that any buyer can understand. Well done. Now keep pounding the real estate topic. One word of advice....I would love to see a tagline at the end, something that summarizes what you are giving each and every reader and it will become your marketing zinger. :)

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