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Earnest Money: Clarifying The Confusion For Pensacola Home Buyers – Part 1

Earnest money is all about commitment. My real estate experience has shown that earnest money is a topic unfamiliar to many home buyers in the Pensacola real estate market. I have worked with many clients who did not understand the earnest money concept when making an offer on a Pensacola home.

We’ll tackle the 4 biggest questions I have encountered when working with Pensacola real estate buyers:

1. What is earnest money?Earnest_money_check_writing_RS250

2. What is the proper amount of earnest money to put down?

3. Who holds the earnest money?

4. What ultimately happens to the earnest money?  

We’ll start with question 1, “What is earnest money?” Earnest money is money that the buyer provides along with an offer on a home. It is considered “good faith” money. The buyer is offering good faith to the seller that the buyer will do everything possible to obtain financing and purchase the home. Without an earnest money deposit, the buyer has nothing to lose by backing out of the real estate contract. Note that there are legal ramifications, but these are rarely pursued due to the legal costs involved. In other words, the real winners end up being the attorneys.

When the seller accepts an offer, the seller effectively takes the home off the real estate market. This is done by having the real estate agent mark the listing as “Pending” in the Pensacola MLS. Thus the seller is risking losing a potential buyer while the home is under contract. Buyers in the market will no longer be looking at this seller’s home. In addition, the seller is paying holding costs up until the home is sold. For this reason, larger earnest money deposits make the seller more comfortable with the potential buyer. Larger earnest money deposits show that the buyer is more committed to the purchase of the home. 

Sale_Pending_Sign_RS250
2. What is the proper amount of earnest money to put down?

The answer depends on the price of the home and local real estate market conditions. Typically in Pensacola homes under $100K, a $1000 earnest money deposit would be acceptable. For higher priced homes, generally 1% of the purchase price is generally considered acceptable.

Real estate market conditions are also a factor in the amount of an earnest money deposit. Pensacola, as with much of the country, is experiencing a strong buyer’s real estate market. In a buyer’s market, buyers generally offer a minimum earnest money deposit. However, in a seller’s real estate market, as Pensacola experienced after hurricane Ivan, the amount of the earnest money deposit can make the difference between acceptance and rejection of an offer. If a seller has multiple offers, or expects more offers soon due to market conditions, the seller is more likely to accept an offer with a larger earnest money deposit, all other factors being equal. Temp1

A common negotiation tactic used by seller’s real estate agents is to include an increased earnest money deposit in a counteroffer.

In some situations, when acting as a buyer’s agent, I counsel my buyers to break the earnest money deposit into 2 separate payments. A minimum deposit is included with the offer. Another earnest money deposit is promised after the completion of a home inspection. This method works in the interest of both the buyer and seller. The seller ultimately gets a larger earnest money deposit, and the buyer learns of the condition of the home before making a full earnest money deposit.

In part 2 of this article, I will discuss questions 3 and 4. Who holds the earnest money, and what happens to it in the end. 

Click below to read Part 2:
Earnest Money: Clarifying The Confusion For Pensacola Home Buyers – Part 2 
 

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  1. Gainesville Real Estate

    Great post, there is a cloud of ignorance around home financing. I wish more people like you would just explain things in simple terms so the common man can understand what is going on.

  2. real estate contract

    I think that it is also important to note that earnest money is NOT required for a real estate contract or purchase agreement to be valid. While it is advisable for a buyer to include earnest money with an offer, it is much less important in a “buyers market” atmosphere such as the market we are in now.

  3. Karl

    It is true, as I have found, that many people don’t understand the earnest money concept. Thanks for the support on this one.

    I also appreciate the comment about earnest money NOT being required. In my goal of explaining the earnest money concept, I somehow forgot to point this out. I’ll make sure to add it in Part 2 of the article.

    Great input. Thank you.

  4. Charles Woodall, Dothanhomesearch.com

    This is good stuff Karl. Very in-depth coverage of something that is often not fully understood by buyers and sellers. I am looking forward to the next post.

  5. Paula Henry, Indianapolis Real Estate

    Karl – Great presentation of a complicated and misunderstood subject.Although it is true earnest money is not required, many sellers do not accept “love and affection” or a “promise” as a serious offer.

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