What Is Earnest Money in Real Estate?
Buying a house is like driving a car. There are tons of elements that go into having a smooth ride. For first timers, learning all the ins and outs can feel overwhelming.
One of these details is knowing about earnest money. Once you go through the process of buying a house it makes sense, but not necessarily for someone just starting out. Let RealtyHive help you get behind the wheel — find out how earnest money and real estate go hand in hand.
What is earnest money?
Let’s say you found the perfect house to buy. However, there are many other interested buyers who also think it’s the perfect house.
When putting in an offer, you can offer earnest money to the seller. It’s kind of like saying, “Look, I’m so interested in this house that I’m ready to start paying for it.”
Do buyers just write a check for the sellers?
Not exactly, but as a buyer, you would write a check. It goes to your real estate agent, who gives it to the seller’s real estate company’s trust account.
The check can come out of your personal or business account, but as stated, it’s written out to the seller’s real estate company’s trust account. This money then gets held in escrow, which is owned by the real estate company who has the listing for sale.
With a FSBO property, the money is typically held in an account owned by the title company or lawyer. Only in FSBO deals would you actually show the check to the seller — otherwise, the agents handle it.
Do buyers get the money back?
That depends. Assuming everything goes well and you make it to closing, you as the buyer will have the money from your earnest check applied as a credit on the deal. Essentially, the money will go towards the house you just bought.
However, if you don’t include contingencies in your offer and end up backing out of the deal, you’ll probably lose your money.
Here’s an example: You found a glaring issue during the house inspection and no longer want to buy the house.
- If you include a contingency about the home inspection in your offer, you’ll get your earnest money back.
- If you don’t include a contingency, you’ll lose your earnest money.
Is earnest money the same as a down payment?
No! For that reason, it’s crucial that you save enough money for both a down payment and earnest money — don’t put all your eggs into one basket. Even though you can get your earnest money back as a credit, you don’t get to spend it towards the down payment.
How much earnest money should buyers offer?
This completely varies, usually by property price. Some agents recommend putting 1-2% down. Others say $1,000 or another specific monetary value. You don’t want to put yourself into a lurch by offering too much money, but you also want your offer to stand out. If you’re really committed, it’s OK to write a bigger earnest check.
When do you put earnest money down?
You’ll put the money down once your offer is accepted, usually a few days after you find out the sellers took your offer.
Why do buyers offer earnest money?
Buyers offer earnest money as a way to make their offer stand out. The buying market is pretty competitive. As a buyer, you will need your offer to stand apart from the others — some properties get 10, 20, or even more offers on their home.
But even when prices are low and the number of houses on the market is high, buyers will still put down earnest money (usually a smaller amount). Buyers want to show how serious they are. Even if you’re looking to buy in a less competitive market, earnest money is standard practice.
Hopefully this clears up some questions on earnest money, but contact RealtyHive if you have more questions! We work with buyers, sellers, and real estate agents, and have the knowledge you seek. Look through our listings to get started.