In a highly competitive housing market like Seattle, a prospective buyer whose offer is accepted by a home seller generally wants to do everything they can to assure that seller that they’re serious about the purchase. That’s where earnest money, or an earnest money deposit (EMD), can help.
A buyer typically places an EMD into an escrow account within two business days after their offer is accepted. This way, it’s under the control of a third party – usually an escrow agent. It’s intended to demonstrate that they are committed to going through with the transaction and generally goes toward the down payment on the home or the closing costs.
An EMD is a percentage of the home’s purchase price. Here in the Seattle area, it’s around 3% but can go higher. A buyer should be careful not to go too high with their EMD – for example, over 5%, in case they lose it. It’s meant to be a small percentage of the home’s value.
Terms and conditions (contingencies)
The home’s purchase agreement includes the terms and conditions of any EMD. They’re more commonly known as contingencies. If the sale doesn’t go through for some reason, they detail whether the buyer gets their EMD back or the seller is allowed to keep it. Contingencies usually revolve around inspections, appraisals and financing.
It’s critical for both the buyer and seller to read and understand these contingencies. That way, they know the consequences if one of them backs out of the sale because of an issue that arises with the property (like a defect that wasn’t disclosed or known about), the buyer’s ability to get the financing or other assets they need or unforeseen circumstances that have nothing to do with the home itself (like a move to or from Seattle being canceled).
A home sale or purchase is one of the largest financial transactions most people ever make. In addition to having a good real estate agent, having experienced legal guidance can help buyers and sellers protect their rights and their money.