After finding the perfect home, buyers start the purchase process with an offer that includes earnest money. Typically 1% or 2% of the purchase price, this good faith deposit is an indicator of the buyer’s interest. The buyer and seller can negotiate this figure, and a buyer may choose to offer 3%, 4%, or more to sweeten the deal.
How Earnest Money Works
If the buyer backs out after signing the contract, they lose the money. If they make it to the closing table, the buyer gets the money back as a credit. After the seller accepts the offer, the buyer’s earnest money deposit goes into an escrow account held by the title company that will handle the closing.
It sounds simple enough, but the buyer can potentially lose tens of thousands of dollars or more — in some cases their entire savings — if they make a mistake.
Mistake 1: The Buyer Offers a Deposit That’s Too Small
Deciding exactly how much money to offer is a big decision. In a seller’s market, buyers may be competing with others for the same property. In a buyers’ market, the seller may deal with several phantom buyers who put in an offer with no real intent to buy. Earnest money helps them figure out who’s serious about buying their home. On the one hand, the buyer wants to offer enough earnest money to show the seller just how interested they are in the property. At the same time, there’s always a risk they can lose the money somewhere between the offer and the closing. However, buyers who offer a deposit that’s too small also risk losing out on the entire deal.
Mistake 2: The Buyer Fails To Meet Contract Deadlines
The clock starts ticking when the buyer and seller sign the purchase contract. Both parties have a limited amount of time to complete their duties related to the sale. This includes completing inspections, finalizing the mortgage, and reporting disclosures. The seller may agree to amend the contract if the buyer needs extra time, but that’s not guaranteed.
Missing a deadline can void the contract, and the party that violated the contract determines who gets the earnest money. The buyer is responsible for reading the contract and making a note of each deadline they have to meet.
Mistake 3: The Buyer Forgoes Contingencies
In a hot real estate market, the buyer may be tempted to take drastic measures to catch a seller’s attention. This includes giving up contingency clauses: mortgage, title, home inspection, appraisal, and insurance. These contingencies give the buyer the right to back out of the agreement if they run into a problem.
For example, the title search may reveal a property tax lien or an easement given to a neighbor that gives them access to the property. The house may fail the home inspection due to a foundation issue. The appraisal may come back too low, leaving the buyer with the choice to make a bigger down payment.
How Buyers Can Hold On to Their Earnest Money
Fortunately, buyers can take steps to avoid or mitigate these earnest money mistakes. With some forethought and guidance, they can make an offer confidently.
1. Set Limits
Before buyers begin looking for a home, they should spend some time thinking about the type of property they want, including size, number of bedrooms, and other features. This is a good time to make a list of must-have features, nice-to-have features, and deal-breakers. Buyers also need to know how much they can realistically spend. Defining criteria now lowers the chance buyers will hastily agree to buy a home that doesn’t meet their needs.
2. Be Wary About Removing Contingencies
Contingencies exist for a reason. It’s easy to fall in love with a house at first sight, and buyers are sometimes surprised to find out the home’s secrets. However, being forced to go through with the purchase of a home that’s inaccessible, uninsurable, or severely damaged can be a costly experience.
What you spend to correct the problem may be more than what you would have lost if you walked away. However, buyers don’t have to put themselves in the position to make that decision. They can walk away from a seller who refuses to accept a contract with contingencies.
3. Work With an Experienced Team of Professionals
Selecting a reputable real estate agent is incredibly valuable for the buyer. They can explain contingencies to the buyer in great detail, so they’re better prepared to decide which contingencies to include in the contract. A real estate professional can negotiate the contract with the seller to ensure each contingency makes it into the document. The buyer should work with someone they trust to guide them through the process.
In addition to selecting the right real estate agent to handle your purchase, partnering with the right escrow company is crucial to making sure the purchase closes on time and stress-free. Our staff at New Venture Escrow has been serving sellers and buyers in southern California for more than a decade. We use innovative, industry-leading technology to simplify the closing process and make it more transparent for everyone involved. Find out how we can help you make your dream home yours today.
