Understanding the importance of the Earnest Money Deposit (EMD) in a real estate offer is always an interesting conversation with home buyers. How much should it be? Where does the money go?
Essentially the EMD is money that gets deposited into an Escrow Account if your real estate offer is accepted, or gets “ratified” by both parties. In Virginia, that check gets deposited in the bank within three business days. In fact, you (the buyer) are putting your money where your mouth is and demonstrating that you intend to take this contract seriously with the full intent of completing the purchase.
So, how much should the deposit be?
The deposit amount will vary depending on the price range. Since it is money that eventually gets credited toward your down payment, I recommend an amount that will impress the seller when the seller is reviewing your offer recognizing that you are all-in, or really serious about buying their home. An amount that is too low will weaken your offer and damage your negotiating position.
The amount impacts your negotiating strategy
The Sales Contract that we use outlines that your check will be put into an escrow account that complies with rules and regulations of Virginia and Title 38 of the U.S. Code. So the money gets “parked” and is only released per the terms of the contract. The Regional Sales Contract also states that, if the agreement is declared void, then all parties will sign a Release Agreement which also states the Deposit will be returned to the Purchaser in full. It is important for you to know that if, for example, the home inspection discovers that the home was built on quicksand and is sinking then you can void the contract and get your deposit back.
I discuss the many ways that you can void your contract when we put it together.
While there are consumer protection clauses in the Regional Sales Contract, it is important for you to know that you can lose that deposit too through Default. A default can happen when you have deliberately done something that prevents you from completing the transaction such as going out and buying matching his and her BMWs. Although I have used this vivid example for years, it still makes the point that poor judgment won’t be considered a reasonable “out”. And, it is important to know that your EMD isn’t necessarily the limit of your liability. But hey, I’m only a real estate agent and you will need a lawyer in this case.
Tip: Don’t start any new credit lines when “under contract”
Understanding the strategy behind having a strong EMD is very important when you may be in a multiple-offer situation. If that case, there is at least one other party who is submitting an offer to buy the home and it is important to view the negotiation from the seller’s point of view too. There are many X-factors in real estate negotiation strategy and the size of the EMD can demonstrate your sincerity and influence the seller’s decision especially if the competing offers are similar.
For more tips on real estate, read through some of my past posts or give me a call to set up a time to meet to discuss your plans.