What happens to your earnest money deposit?

by Dan Krell &copy 2009

Nothing confuses home buyers and sellers more, than earnest money. Simply put, earnest money is given as consideration money for the home seller to accept the home buyer’s offer, to take the home off the market and deter the home buyer from defaulting. For a home seller, the larger the earnest money the better; the home seller will surely be happy with a nice chunk of change deposited as earnest money. The home seller views the earnest money deposit as a possible source of compensation for damages in case of buyer default (but is not guaranteed).

Although the amount of earnest money is negotiated between the home buyer and seller, a home seller may sometimes require a minimum amount of earnest money to be held as consideration for the purchase. However, the amount offered as earnest money varies. Factors often taken into consideration when deciding on an amount to offer as an earnest money deposit includes: the price of the home being purchased and the amount of money the home buyer has available.

Many home buyers have the notion that the higher the amount of the earnest money, the more apt the seller would accept the offer. But this is not always the case. During the huge seller’s market earlier this decade, it was not unusual for home buyers to write very large earnest money checks, sometimes up to ten percent of the sales price! Home sellers required these large amounts as consideration and to differentiate the best offer from the many they received. However, as the market cooled, home sellers were happy to receive any offer – even with a modest earnest money amount.

Earnest money is not used much now to differentiate home buyers. The bottom line for many home sellers (especially for foreclosures and short sales) these days includes the net at closing and ensuring the home buyer completes the purchase. Because buying distressed properties can take longer than a usual sale, many home buyers are deciding to offer low amounts for earnest money so as to not tie their money up for several months.

Most often earnest money is given in the form of a personal check that is often held in an escrow account by the buyer’s broker. Sometimes, the seller requests that their broker or title agent hold the deposit. Additionally, the seller sometimes requests the earnest money be in the form of certified funds (such as a cashier’s check or money order); this is to ensure the funds are available.

If the home sale goes as planned, then the earnest money is credited to the home buyer at settlement. However, the fate of the earnest money is often in question when the sale is not consummated. If the home seller feels that the home buyer is in default, the seller will often try to claim the earnest money; but it is not always easy.

There is nothing more contentious than earnest money in a real estate deal that did not close. If you have questions about the disposition of an earnest money deposit, you should always consult an attorney. If the deposit is held by a Maryland real estate broker, the broker can only distribute the earnest money deposit in accordance with Title 17 Maryland Business Occupations and Professions of the Annotated Code of Maryland 17-505.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 7, 2009. Copyright © 2009 Dan Krell