Certain misunderstandings exist regarding the purpose and proper handling of an earnest money deposit given by the buyer in a real estate transaction. In fact, disputes over forfeiture of a deposit are quite common. So, to avoid problems in a future real estate purchase, let’s look at the role that the deposit plays in buying real estate.
DEFINITION:
The earnest money deposit is a sum of money paid by the buyer at the time of submitting an offer to purchase real estate.
PURPOSE:
The purpose of the deposit is to show “good faith” by the buyer that he or she intends to follow through with the terms of the sales agreement. If the buyer does not live up to the agreement, the deposit shall be forfeited to the seller as payment for any damages suffered by the seller as a result of the sale not being completed as planned.
AMOUNT:
The amount of the deposit varies in different areas depending upon local custom or the specific needs of a particular transaction. The size of the deposit will have an effect on the desirability of the offer. Many buyers have won properties away from competing offers only because they gave a larger deposit than others being considered by the seller. If you really want a piece of property, make your deposit large enough to help your offer win acceptance. As a minimum, in Oahu real estate transactions, I generally prescribe an amount equal to $1000 per $100,000 value of the property being purchased up to a $1 million purchase price. Above $1 million, the amount varies. So, if you were planning to purchase a $500,000 property, I would suggest $5000 as the MINIMUM earnest money amount necessary to secure your offer. A higher amount might be more appropriate depending on the buyer’s goals and active competition for the subject property.
ADVICE:
Always buy through a Realtor® so you may have the assistance of a professional when making an offer on your next home. I would be glad to assist you if you have any questions.
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