How Does Earnest Money Work?

January 23, 2024

In the realm of real estate transactions, the term “earnest money” is pivotal, often serving as the first handshake between buyer and seller. This financial gesture, both symbolic and substantial, signifies a commitment that goes beyond mere intentions. Let’s look at some of the details around earnest money and how it works.

Defining Earnest Money

At its core, earnest money is a monetary deposit made by a potential buyer to demonstrate their serious intent to purchase a property. This upfront payment, typically a percentage of the property’s purchase price, acts as a tangible commitment and a crucial component of the offer.

The Purpose

Beyond its financial value, earnest money serves a multifaceted purpose in real estate transactions. It acts as a deterrent against frivolous offers, compelling buyers to think twice before making an offer. Simultaneously, it provides the seller with a sense of security, knowing that the potential buyer is financially invested in the transaction.

Determining the Deposit Amount

The amount of earnest money can vary based on factors such as the local real estate market, property value, and negotiating dynamics. Commonly, it hovers around 1-3% of the property’s purchase price, though in competitive markets, it might lean towards the higher end of the spectrum.

Escrow Accounts and Neutral Custodians

To ensure a fair and impartial handling of earnest money, it is often placed in an escrow account. This account, managed by a neutral third party, prevents either party from gaining an undue advantage. It safeguards the funds until the completion of the transaction or the agreement’s termination, at which point it is disbursed according to the agreed-upon terms.

Contingencies and Protecting Buyer Interests

Buyers may incorporate contingencies into the offer, allowing them to recover earnest money if specific conditions, such as a failed home inspection or mortgage approval, are not met. These contingencies act as a safety net, providing buyers with an avenue to retract without financial repercussions in certain circumstances.

Forfeiture and Seller Safeguards

While earnest money primarily safeguards the buyer’s interests, it also offers protection to sellers. If a buyer backs out of the deal without a valid reason, the seller may be entitled to retain the earnest money as compensation for the time the property was off the market.

Earnest Money Dos and Don’ts

When you’re ready to negotiate and commit earnest money, here are some general dos and don’ts to think about

Earnest Money Dos

  • Clearly Define Contingencies
    Do be sure to work with a real estate agent to clearly define contingencies in your offer. Specify conditions that, if unmet, would entitle you to the return of earnest money, protecting your interests.
  • Use a Neutral Escrow Service
    Do opt for a neutral and reputable escrow service to hold the earnest money. This ensures a fair and unbiased handling of the funds, benefiting both the buyer and the seller.
  • Get Everything in Writing
    Do document all aspects of the earnest money agreement in writing. From the deposit amount to contingencies, having a written record helps avoid misunderstandings and provides legal clarity.
  • Understand Forfeiture Conditions
    Do make sure you understand the circumstances under which the earnest money may be forfeited. Knowing the terms of forfeiture protects you from unintended financial repercussions in case the deal falls through.
  • Stay Informed About Timelines
    Do stay vigilant about timelines. Be aware of key dates, such as the deadline for contingencies and the closing date, to ensure you adhere to the agreed-upon schedule.

Earnest Money Don’ts

  • Ambiguity in Contingencies
    Don’t leave contingency clauses vague or ambiguous. Ambiguity can lead to disputes and jeopardize your chances of recovering earnest money if the deal falls through.
  • Personal Accounts
    Don’t deposit earnest money directly into personal accounts. Always use an escrow service to ensure a neutral custodian manages the funds and avoids potential conflicts of interest.
  • Deadlines
    Don’t overlook or miss important deadlines in the earnest money agreement. Timeliness is crucial, and failure to meet deadlines may result in the forfeiture of earnest money.
  • Assumptions
    Don’t assume that earnest money will be automatically refunded if the deal falls through. Understanding the specific conditions for forfeiture and refund is essential to avoid surprises.
  • Hasty Decisions
    Don’t make hasty decisions or rush into offers without thoroughly understanding the implications of the earnest money agreement. Take the time to review and comprehend all terms before proceeding.

You Might Also Like…

Recent Instagram Posts

I’m excited to share the back story of the Alder flipper in Portland. 💚🏡

It was a joy to be able to be a part of this transformation! @4mconstruction and @opaldesigngroup made the perfect team in taking this project from start to finish. ✨

It was also very special to capture the previous owner’s reaction to the changes this house has made over the last few months. Caroline is a gem! Don’t miss her reaction and an interview talking about her history with the house. (She first moved to the house when she was 3 years old!) Visit our YouTube channel to watch! The link is in my bio! 🥰

The home is currently on the market and is waiting for the next people to make memories and live and love within the walls of this special home. Want to know more about this listing, DM me. 📲

17 1

Here’s your June market update. 📈🏡

Hint: Market tends to be a little slower.

21 2

Happy Birthday, Heather! This is your team taking over your Instagram to celebrate you! We hope you have a day as incredible as you are. 💚

Join us in showering Heather with some birthday love! 🥳 ⬇

76 28

Join our FREE scavenger hunt, with carnival games, face painting, prizes & more! Bring your whole family to Hammerle Park shelter in West Linn on June 25th from 10am-12pm. It’s going to be so fun and I’d LOVE to see you there!

📲 DM or text me to RSVP! 💚

30 5

According to a study published in the journal, Scientific Reports, sounds of nature physically alter our brains’ connections, reducing our body’s natural fight-or-flight instinct! 🤯

In today’s busy world, your home should be your sanctuary.

Here’s how to fill your space with calming sounds for ultimate relaxation:

Nature Sounds 🐦
-Indoor Fountains: The gentle trickle of water soothes and masks background noise.
-Sound Machines: Simulate rain, ocean waves, or forest ambiance.
-Open Windows: Let natural sounds like birdsong in.

Music for Calm 🎶
-Ambient Music: Choose slow, instrumental genres like classical or jazz.
-Custom Playlists: Create morning and evening playlists to set the right mood.
-Smart Speakers: Easily play relaxing tunes throughout your home.

White Noise 🤍
-White Noise Machines: Perfect for bedrooms to ensure restful sleep.
-Apps and Devices: Use in home offices to improve focus.

Wind Chimes 🌬
-Placement: Hang near windows or in gardens to catch the breeze.
-Variety: Choose tones that resonate with you, from bamboo to ceramic chimes.
Mindful Tech Use:

Meditation Apps 🧘🏻‍♀️
-Try Calm or Headspace for guided meditations and soundscapes.
-Smart Home Integration: Automate calming sounds throughout the day.

What do you do to integrate calm and peace into your surroundings?

11 1

I went to drop by the Alder flipper to get more video and got to see these amazing Dewart sisters! Jennifer and Jessica have been friends and clients for years. These two run a powerful and impressive short term rental portfolio, and other real estate investments. They are always up to something new in real estate. I LOVE being around them! They are brilliant, beautiful, independent, and capable of conquering the world. So fun that mom came along to see the Dewart sisters and catch up! And I`m so lucky to be able to work even closer with Jessica since she`s now a part of the RRG team! 💚 ...

43 3

Just some thoughts after filming a recent lifestyle video! 💚

I truly get to work with the most amazing people and I’m just putting it out into the universe how grateful I am!

37 3

Looking for tips on creating a cozy home, getting involved in our community, or navigating the real estate market? ️

There’s a wealth of knowledge waiting for you on our blog! We cover a variety of topics to help you love your home and neighborhood. Don’t miss out on the fun – check it out now! 💚💚💚

🔗 Link in bio!

6 1


Stay up to date on news and listings that are coming soon!