Earnest Money

Earnest deposits have become a standard requirement in real estate transactions.  Earnest deposits are funds provided by the buyer in good faith, to ensure the sellers of their intent to buy the property.  These funds are put aside and ordinarily deposited into an escrow account held by a title company. 

The earnest money given to the sellers will compensate the sellers in the event you default on your agreement to buy the property.  Sellers are required to take the property off of the market for a period of time; during this time, the sellers are no longer allowed to accept any other offers on the property.  In a sense, they are “putting all of their eggs into one basket”, or rather, putting their faith and reliance in you, the potential buyer.  If you do not meet your obligation, the sellers will have lost out on obtaining other potential buyers, which is why the sellers will require upfront compensation, in the form of an Earnest money deposit.

An Earnest money deposit will range from $500 to $5000. From what I have observed on contracts, currently the range of $1500 is the average.  Assuming that the average monthly mortgage amount is $1500, the sellers have not put unrealistic expectations with their earnest money requirements.  The house will be off of the market for about one month to accommodate the sales transaction, which explains why this is a logical approach.

On rare occasions Earnest money may not be required, or instead a promissory note will be written.  These situations are quite rare, but can still happen. Earnest money requirements can be negotiated and your realtor will be able to walk you through the process.

One final thought: Earnest money will be used in the transaction as a part of your closing costs.  Sellers do not want to keep your earnest money--they want to sell you the property.  The Earnest money will only be distributed to the seller if you default on your responsibility to fulfill the contract.  If you honor the contract in good faith then the funds of your earnest money will be credited back to you during the transaction.  Just remember that it is your money: what happens to it is entirely up to you.