What is an Earnest Money Deposit? And how does it work?
The Earnest Money Deposit (EMD) in a real estate transaction is also sometimes referred to as Deposit, Escrow Deposit, Good Faith Deposit, etc.
The deposit provides financial proof to the seller, that the buyer is serious and committed to closing the transaction. It also binds the buyer to going through with the transaction.
Without a financial deposit in place, many purchase offers would like fall out of escrow as there would be almost no risk to the buyer if they change their mind.
On the seller’s side there is much more risk in commencing a sale process that can easily fail. A seller could potentially spend valuable time on a an offer and purchase agreement that is not really serious, while losing out on offers that were in fact serious.
How Much is The Earnest Money Deposit?
In California real estate transactions the Earnest Money Deposit (EMD) is typically 2-3% of the agreed upon purchase price.
When a buyer submits an offer on a property, and that offer is accepted by the seller, the purchase agreement, by default, will require that the buyer deposit the Earnest Money Deposit within 3 days of acceptance of the purchase agreement.
The number of days can be negotiated to be different but in most cases, it remains at 3 days.
How is Earnest Money Deposit Submitted?
The earnest money is most commonly submitted by the buyer in the form of a bank wire transfer or check which is made out to the listing broker, or more often, to the Escrow company administering the escrow file for the transaction.
How can I lose my Earnest Money Deposit?
There are contractual contingencies in the Purchase Agreement that protect buyers from losing their Earnest Money Deposit.
The most important contingencies that protect a buyer’s Earnest Money Deposit are the Physical Inspection, Appraisal, and Loan Contingencies.
It is the real estate agent’s job to understand these contingencies, their timelines, and to know if, and when these contingencies should be removed in order for the escrow to proceed to closing.
The buyer and seller have different interests in relation to when these contingencies should be removed or lifted.
Both seller and buyer should have good communication with their agent about the removal of these contingencies.
How Can I get my Earnest Money Deposit back?
A buyer can use contingencies to effectively cancel or possibly void a purchase agreement and obtain a return or refund of their Earnest Money Deposit.
As long as one or more of the contingencies have not been removed, a buyer should be able to get their Earnest Money Deposit returned to them by using these contingencies to cancel the agreement.
To ensure your Earnest Money Deposit, it is important that your agent understands the timeliness for removal of contingencies well, and he/she communicates those to you so you can make an informed decision on the way to closing your home.
Additionally, If the seller is in breach of the purchase agreement, where no remedy can be found by the parties, then the buyer may also be entitled to a return of their Earnest Money Deposit.
Earnest Money Deposit funds are automatically incorporated into the purchase settlement during escrow and you can find its itemization in the escrow settlement statement after a successful closing of escrow.
These are general guidelines of the Earnest Money Deposit process, your situation can vary depending on the variables of your purchase, contract, and circumstances.
If you have a problem related to your Earnest Money Deposit, you should work with your agent and broker to resolve it. Further escalation of the matter should entail consultation with a real estate attorney.
If you have any other questions about Earnest Money Deposits, or any other real estate questions, please feel free to contact me.