Real estate has its fair share of horror stories. One that keeps both first-time homebuyers and seasoned pros up at night is the thought of sellers walking away with their hard-earned money, all with nothing to show for it.
While these situations where a seller would get to keep your earnest money deposit are rare, they can happen. Fortunately, there are things that you can do to protect yourself during your transaction. Keep reading to learn more about what earnest money deposits are, how they work and how to keep your money safe. By the end of this article, you should be confidently able to put your money to work for you.
How Earnest Money Deposits Work
Once you submit an offer on a home, the agent that you?re working with will ask you to submit a check along with your paperwork. This money will be referred to as either your ?earnest money deposit? (EMD) or ?escrow deposit? throughout the transaction.
How much your deposit is worth may be up for negotiation, but you should expect to put forth between 1-3% of the home?s purchase price.
It?s important to remember that the seller will be able to keep the money if you decide to walk away from the deal without cause. This deposit acts as a reassurance to the seller that you?re serious about buying the home.
All The Details Should Be In Writing
Going into your transaction, you can think of your Agreement of Sale like a roadmap.
It outlines all of the important details of the transaction. This includes all of the contingencies or events that need to happen in order for the deal to continue moving forward, as well as the dates by which they need to occur. Usually, these will be things like the satisfaction of any issues found during your home inspection and a satisfactory appraisal, but they can also be particular to your transaction.
As you put your offer together, it?s your and your real estate agent?s responsibility to negotiate in your own best interests. Read over everything, and consider the dates and contingencies carefully before signing on the dotted line.
Hold Up Your End Of The Bargain
Once everything is in writing, it?s absolutely crucial that you meet any deadlines and expectations that have been laid out for you in the finalized contract. Failure to do is one of the most common reasons why sellers are ultimately able to keep earnest money deposits if the deal falls through.
In this situation, organization is key.
I recommend going through your Agreement of Sale after everything has been signed off on. Go over it with a fine-tooth comb and make a list of your relevant responsibilities and dates to be aware of. Put everything in a timeline, and keep it close at hand so you can refer back to it easily.
When dealing with deadlines, be sure to leave yourself plenty of room. Whether it?s getting financial paperwork to your lender or scheduling inspections, be sure to leave yourself plenty of time to spare. You never know when the unexpected may pop up and a task may end up taking longer than expected.
Report Roadblocks Early
That said, however, we all know that things don?t always go according to plan.
If a problem crops up during the course of your transaction ? and it becomes clear that you?ll be unable to meet your contingencies on time ? speak up ASAP. Often, when you?re still within the original time frame, these things can be renegotiated via an addendum to reflect the change in your circumstance.
If there?s one thing you never want to do, though, it’s missing a deadline without prior notice. While doing so isn?t an automatic assurance that the sellers will walk away with your earnest money deposit, if the deal goes south, it gives them the option to do so, even if the deal dissolves over another issue.
When in doubt, your best bet is to be upfront and honest whenever possible during the course of your transaction.
Because your earnest money deposit acts as a ?good faith? commitment to buying the property, you will be penalized if you back out of the purchase contract for no good reason, e.g., buyer?s remorse, cold feet or a change of heart. In those cases, you will forfeit your earnest money deposit to the seller. If you decide to withdraw your offer after it has been accepted, the contingencies noted above are your only loopholes.
However, as long as you perform according to the schedule outlined in the purchase agreement, your earnest money deposit should be safe and available for you should you need to walk away from the purchase.
BEWARE – For a refund of the earnest money to occur, both parties to the contract must agree. For some reason, real estate agents do not explain this upfront. The safest bet overall is to insert into the purchase contract itself that the money is refundable in the event of certain conditions or circumstances or non-refundable in the event of certain conditions or circumstances, and not to rely on the good faith of the other party to the contract !!!!