What is earnest money, how much is required, how do you get it back and are there any alternatives? Learn how it is used when purchasing Texas residential real estate and what you need to be aware of.
What is Earnest Money?
Earnest money is a deposit by the buyer to show the seller good faith that they are serious about completing the contract. It can be awarded to the seller as damages in the event the sale doesn’t take place or is credited back to the buyer upon a successful sale.
Earnest Money Requirements and Custom
How much Earnest Money is required is negotiable between buyer and seller. The generally stated requirement is 1% of the purchase price but this can change based on market conditions. In a buyers market, sellers often take less & in a seller’s market the seller may want more.
The reality is that it’s not unusual to see $500 in earnest money for properties selling below 100K & $1000 for properties selling up to several hundred thousand, then much more in the higher price ranges. There is no magic point where it becomes more at a certain list price. In any event, it’s in the seller’s court how much they will accept as an earnest money deposit.
Who gets the Earnest Money?
In most cases the earnest money is held by a title company as the escrow agent. It can also be held in an attorney or brokerage account as well as directly with a builder. In most residential re-sales the title company is the holding agent.
A word about title companies in Texas. Title companies have no dog in the hunt. They are simply a neutral party that handle the holding & transfer of funds, payment of real estate taxes & mortgages, satisfying liens, researches and insures the title and coordinates numerous tasks in order to perform the closing transaction.
How Earnest Money is Reimbursed
If all goes as planned everyone is happy and the earnest money is shown on the HUD-1 closing statement as credited against the purchase price. However, if the sale falls through either buyer or seller can demand the earnest money from the title company. The title company will ask for both parties to sign a release so the money can be distributed.
If a party does not object within 15 days the money will be released to the demanding party. A key to remember is you can’t refuse to sign for spite unless you are prepared to suffer triple damages of three times the earnest money plus other expenses.
Another thing to keep in mind is someone has to pay for expenses that the title company AND others have incurred. The title company has the right to deduct these expenses from the earnest money reimbursement.
Earnest Money Considerations
Earnest money is not a requirement for a valid contract but it is the custom. While there can be situations like a cash offer that a seller might accept without earnest money, it is far from the norm. In most cases a seller receiving an offer without earnest money would immediately reject it.
Putting up a larger than necessary earnest money deposit may make your offer more attractive than others, especially in a hot market. Keep in mind that your money will be tied up in escrow and if the transaction falls through it could be tied up much longer if a party doesn’t sign or files suit.
Earnest Money can be paid in more that one payment. It’s possible to negotiate an initial earnest money deposit with a subsequent deposit if certain agreed upon conditions are met.
An Earnest Money Alternative – The Option Period
The option period in Texas Residential Real Estate is a negotiated period of time used for property inspections and other due diligence. The seller is compensated directly for essentially taking their home off the market while the buyer considers the purchase and has the unrestricted right to terminate and have the earnest money refunded. Often this will be ten days for as little as $100.
The buyer could have put up a huge earnest deposit but if they terminate during the option they get it back, less expenses. Even after the option period, the earnest money is still held at the title company pending any disputes if the transaction doesn’t close.
A different strategy is to negotiate a lower earnest money deposit and a higher option fee. The option money is paid directly to the seller at the beginning of the process. If the buyer terminates, the seller keeps it without the need to deal with a third-party. The same applies if the contract falls through a day before the closing. It’s cash in hand and won’t be reimbursed after the option period unless the closing is successful. Cash in hand is worth more than cash in escrow any day.
To find out more about homes for sale and how contracts are completed, contact Van Alstyne Realtor Keith Laursen today!
