This is a universal truth: Buying a home is an exciting yet challenging process. That’s why it shouldn’t be done without a professional real estate agent. Just one of the many facets of a real estate transaction you’ll need to understand is the concept of earnest money. A sound purchase agreement allows buyers and sellers to proceed smoothly from positions of strength and trust. What exactly is earnest money in real estate?
Earnest money, explained
Essentially, earnest money is what you put down in good faith when making an offer on a property. It shows the seller that you’re serious about buying it — especially in a competitive market, such as the one in ever-growing North Texas — and gives them some assurance that you’ll actually follow through with the sale.
Once the earnest money is received, the seller agrees to remove the property from the market, pending the fulfillment of the contract. Earnest money is held in an escrow account until closing, at which point it is credited to the purchase price of the home. It sounds easy enough — but buyers and sellers should be fully aware of the potential ramifications associated with earnest money, to protect their respective interests.
How much is enough to show you’re, well, earnest?
Depending on the market conditions, an earnest money deposit (EMD) can range from one to 10 percent of the total purchase price. In a seller’s market, with a shortage of inventory, sellers may expect an amount at the upper end of the scale. At Briggs Freeman Sotheby’s International Realty, our famously skilled agents make it their job to be plugged into current market conditions and the prevailing expectations in the negotiation process. They can suggest an appropriate amount that will appeal to a seller’s need for a serious commitment.
Is earnest money required?
While an EMD is generally included in a purchase, it is not legally required in Texas. A contract can still be legally binding if no EMD is specified. Normally, however, an amount is negotiated. The Texas Real Estate Commission (TREC) stipulates that it must be deposited in an escrow account by the close of the second business day after execution of the agreement. If the parties agree on a different timeframe, it must be stated in the agreement.
How to protect your deposit
The idea of depositing thousands of dollars in an escrow account makes many homebuyers uneasy. Earnest-money contingency addendums can help reduce the stress and protect both buyers and sellers. For buyers, it ensures that they will only lose their earnest money if the sale does not go through due to specific factors. For sellers, it ensures that earnest money is only refunded if the buyer has a legitimate reason for backing out of the sale.
Contingencies may be added to clarify that earnest money will be refunded to the buyer if certain conditions are not met. Research from the April 2022 REALTORS Confidence Index Survey shows that the top three issues surrounding both delayed or terminated contracts are financing, home appraisals and home inspections.
Here are some common earnest money contingencies:
Home inspection contingency: The buyer has the right to have the home inspected by a professional and can back out of the contract if they are not satisfied with the results.
Home appraisal contingency: The buyer can terminate the contract if the appraisal is lower than the agreed-upon price.
Financing contingency: The buyer can back out of the purchase if they are unable to secure financing.
Home sale contingency: The buyer can withdraw from the contract if their current home doesn’t sell within a specified timeframe.
Title contingency: The buyer has the right to cancel the contract if the title search reveals any liens or other encumbrances against it.
Kick-out clause: A kick-out clause is designed to protect the seller in situations where the buyer is dependent on selling their current home before closing the deal. The seller provides a deadline to the buyer for obtaining financing. If that deadline isn’t met, the seller can place the property back on the market.
Determining the appropriate earnest-money contingencies will depend on market conditions and the unique circumstances that apply to each real estate transaction. Once the contract is signed, our agents will monitor the conditions and deadlines of the agreement to enforce compliance. We’re here to de-stress our clients — always — and to guide them to a successful outcome.
