EARNEST MONEY

Earnest deposits can be made when the acquisition agreement is signed or it can come with the contract offer. An escrow agent (an intermediary) usually plays an important role in the payment of earnest money. An escrow account is created and the earnest money is deposited into the account, pending on when the deal is reached. As soon as the acquisition deal is closed, the earnest deposit is added to the down payment and closing cost of the buyer.

The buyer and the seller often enter into an agreement, however, this contract does not put the buyer under any obligation to purchase the house. The buyer has every right to reclaim his earnest money deposit in the event that a breach occurs in any of the terms and conditions that were duly signed in the contract. This is not always the case . If a buyer decides not to go through with his plans of acquiring the property due to reasons that were not duly contained and signed in the contract, the buyer will lose his earnest money deposit to the home seller.

A brief example to understand how the earnest money works

Lucy contacts Maxi Realtors of her intention to acquire a detached duplex that is worth $128,000. For the transaction to run smoothly, a real estate brokerage or an escrow agent makes d deposit of 10%, that is $12,800 into the escrow account. Lucy and Maxi Realtors then proceed to sign a contract stating that the present occupants of the duplex that Lucy intends to buy from Maxi Realtors will move out within six from the date the contract is signed.

In a situation where the occupants fail to move out of the property, Lucy may decide to cancel her transaction and get her deposit back. Even though the earnest money deposited (i.e., $12,800) may have yielded an interest of about 5% within six months in the escrow account, Lucy would not have access to the interest because it is less than $5,000.

 

How To Protect Earnest Money Deposits

From the explanation above, there are several ways through which a home buyer can lose his earnest money deposit. Two tips that could help a buyer protect his earnest money deposits are briefly explained below.

1. Use a trusted escrow agent or real estate brokerage

Escrows are third parties in this process. As such it is necessary to investigate, research and assess an escrow before employing their services, in order not to fall a victim of a scam.

2. Pay attention to the contract

It is necessary to read, understand and abide by the terms and conditions contained in a contract. Proper inspection and evaluation of the property should be carried out before the earnest money contract is being signed.