What is Earnest Money?
Earnest money is part of the sale price of Idaho real estate that you pledge to an escrow account as a buyer. When you submit an offer, the offer includes the price you want to pay and how much earnest money you will pay. Your Team Greene real estate agent will most likely use a RE 21 form. This form is the "Real Estate Purchase and Sale Agreement". Section 3 of this contract provides a place to pledge an amount for earnest money and how and when you will pay it. Usually, the earnest money is between 1-5% of the sale price.
Why is earnest money important?
Earnest money is an important part of a real estate transaction. It serves several purposes.
First, it lets the seller know you are willing to risk money to enter the transaction. When a seller accepts an offer from a buyer they take on risk and expenses. For example, the property is usually taken off the market while the transaction proceeds. This means other potential buyers will not see their property. They risk a longer period of time selling the house if the buyer withdraws or defaults. The seller may also incur costs associated with the sale. The seller may have to pay fees regardless of whether the transaction closes.
Second, it is important that the earnest money is put in an escrow account controlled by an impartial third party. This protects your money. The third-party has no interest in the money. They hold the money in case someone defaults on the agreement or the transaction closes. Examples of third parties include a Title Company, Selling Broker or Buying Broker.
Third, when a buyer defaults, it allows the seller to opt for liquidated damages rather than initiate a costly lawsuit. When the buyer defaults, the seller can notify the buyer and escrow account holder. They can say that they want the earnest money because the buyer defaulted. If the liquidated damages request is not disputed, the seller gets the money. This money is then used to pay any expenses they may have incurred. The seller pays any expenses and keeps the remaining money.
Why is it called an earnest money deposit?
A third party holds earnest money in a special account called an escrow account. You give your money to them and they deposit it into the escrow account. Once deposited, you no longer have control over the money. Only the escrow account holder can return it to you by transferring the money back to your account. Escrow account holders transfer money electronically or by check.
- Fun Fact: Earnest money is not always paid with currency. For example, Farmer Fred wants to buy a property. He has no cash for earnest money but has 500 head of cattle. If Farmer Fred and the seller agree on a third party to hold 100 head of cattle as earnest money, they can proceed. Farmer Fred drives 100 head of cattle to the third party's property and gets a receipt from the third party. The receipt is then proof of earnest money. It is a little more complicated than that, but you get the idea.
Where does my earnest money go at closing?
Your purchase and sale agreement includes a purchase price and earnest money amount. If you are buying a house for $300,000.00 and you paid $3000 dollars as earnest money when you made the offer, the $3000 will be deducted from the amount you owe at closing. Since you have already paid $3000, you would subtract $3000 from $300,000, leaving you with a balance of $297,000 that you must pay with cash or a loan. Earnest money is always deducted from the amount due at signing.
Do I get my earnest money back if the seller defaults?
Yes, unless the seller disputes your claim to the money. Earnest money is the buyer's money. Because there is no exchange of property, the escrow account holder issues a refund. But, if the escrow holder is not comfortable with disbursing funds, the buyer and seller have to work it out. Sometimes they do it on their own. If it gets more complicated, they can use arbitration. In other cases, especially when large sums of money, both parties will hire a lawyer. Many transactions start and end with no disputes. In these cases, a real estate agent will send a notice to terminate the contract. In Idaho, our Realtors use form RE20 which is the "Contract Termination And/Or Release of Earnest Money" form. The form references the original agreement and has two parts. Part 1 is contract termination. Part 2 is "Release of Earnest Money and Instructions to Holder." The holder is the person who controls the escrow account where the buyer's money is.
Can I terminate a contract and not release earnest money?
Yes, the RE20 form makes provision for buyer and seller to agree to terminate a contract without releasing earnest money. This is helpful if one party needs to be released from the contract to move forward with a different purchase, while not agreeing to release of earnest money until an agreement can be reached.
Can I pay earnest money online?
Yes. There is an alternative to going to the bank to get a Cashiers Check to pledge your earnest money. There are services online that make it easy to pay and keep good records. One earnest money transfer company that Idaho Agents Real Estate brokerage uses is EMTransfer. EMTransfer makes it easy for real estate buyers, real estate agents, and earnest money holders to manage money. EMTransfer is not an earnest money holder. They are a secure means of electronically transferring money between people and institutions online.
If you have further questions about earnest money, one of our Eastern Idaho agents can help. Give us a call at 208-717-1748 or click on the instant chat icon below.