Sunday, November 25th, 2018 November25th2018

Sell for More Trivia: What is the purpose of Earnest Money?

Published on November 25th, 2018

Beau Beach

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Earnest money is a form of security deposit made in most real estate transactions.

The payment is meant to demonstrate that the buyer is serious. By making the payment the buyer is showing good faith about wanting to complete the transaction.

Most earnest money is refundable to the buyer if a contingency is exercised and the deal doesn’t close.  If the deal does close the payment is applied to the purchase price at closing.  In the event the deal doesn’t close and it’s the buyer’s fault and the buyer doesn’t have a contingency to cover them, then the earnest money could be payable to the seller. This is where it gets complicated.

Most of the time the earnest money is held by a settlement or title company. They will only pay the earnest money to the seller if the buyer authorizes them to in writing or by court order.

So if the buyer won’t agree to sign the deposit over to the seller, that’s when the lawyers get involved. Usually a settlement is reached that gives the company holding the funds instruction on what to do with them. Or a court order will if the legal process is followed until the end.

The lesson here is that sellers often assume it’s easier to collect earnest money than it really is.

A rule of thumb for the appropriate amount of earnest money is 1% to 3% of the purchase price although its common to see round numbers like $10,000 or $25,000.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Prowess IRES which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com