What is earnest money? Why is it important? What does it do for me?
These are all questions that you, as a future home buyer, may have!
If you've never had a part in a real estate transaction before, or maybe you've moved from a buyer's market into a seller's market, you may not have come across a situation where you need an earnest money deposit in a real estate transaction. So, what is it, and how does it benefit you?
Earnest money is money put down into a transaction to show that you are a serious buyer.
Note: this is not a requirement of a real estate transaction, so you'll never be in a situation where you absolutely have to put an earnest money deposit down. However, in some cases an earnest money deposit is highly recommended, especially if you're in a competitive market and want to be seen as a serious buyer.
How does it benefit you?
There are a lot of different ways you can negotiate in a real estate transaction to have the best chances of getting an offer accepted. Earnest money is used to show the seller that you have some skin in the game, and can greatly increase the chances that your offer will be accepted. Sellers want serious buyers because they want their house sold; any indication you can give them through an offer that shows you are a serious buyer is recommended. A lot of sellers in a competitive market will actually not consider an offer unless there is earnest money offered, especially if they are an experienced seller.
How does it work?
When your agent makes an offer on a property, the offer includes whether or not there will be an earnest money deposit made and, if so, how much that earnest money deposit will be. If your offer is accepted, you then have so many days to make that deposit with your agent's broker. The funds are held in escrow and can be used at the closing table if the transaction closes, or may be returned to you if things don't work out, or may even be held in escrow and not returned depending on the circumstances (talk to your agent!)
Overall, if you're in a seller's market or in any kind of market that is highly competitive, make sure you discuss with your real estate professional whether or not earnest money is expected, whether it will strengthen your offer, and how much an earnest money deposit typically is in your market.
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