Earnest Money? What do you mean, Vern?

Ok that's the last Ernest joke, I promise.  Most of you probably don't even know who that is anyway.

So, another term that most people don’t run into outside of a real estate transaction is “earnest money”  However, there is a term that many people are familiar with, and is certainly similar: security deposit.

Thinking of earnest money as a security deposit is fairly accurate.  Like a security deposit, the earnest money in a real estate transaction is meant to communicate the seriousness of the person paying the deposit.  The earnest money has the potential to become liquidated damages to a seller, should a buyer decide to break the contract for reasons other than the agreed contingencies in the sale agreement.

The earnest money deposit is typically paid within 3 business days of mutual acceptance of an offer on a piece of property.  It is paid directly to the title and escrow company agreed to by the buyer and seller.  And it is held in escrow until closing, when it becomes a part of the buyer’s final down payment and closing cost amount.

In Oregon’s typical real estate contracts, there are two standard contingencies applicable to most purchases that will allow a buyer to receive their earnest money back and terminate a contract: the inspection contingency, and the financing contingency.  In most other cases, if a buyer simply gets cold feet, or finds another property that they would rather pursue, the earnest money deposit would be relinquished to the seller as liquidated damages for breaking the contract.  A closer look at contract contingencies can be found in a different blog post.

Typically, around 1% of the purchase price is a good number to use for a buyer to determine an earnest money amount.  However, in a competitive, multiple-offer scenario, a higher earnest money amount can be strategic.  In the end, there is no set amount required for earnest money, and it’s a good idea to remember that it will be removed from the buyers account and held in escrow.  So be sure to budget accordingly.

More questions about earnest money?  Contact us!