July 7, 2006: How much should you put down as an earnest deposit on a home purchase?
Here's a complicated question: How much money should you put down as an earnest deposit on the purchase of a home?
If I'm representing the buyer, I want the earnest deposit to be the smallest amount we can get away with and still get the home under contract.
If I'm representing the seller, I want the earnest deposit to be the largest amount we can hope for while still hanging on to the buyer.
Why? Because the earnest deposit is liquidated damages to the seller in the event of non-performance by the buyer. The seller can accept the earnest money in lieu of other damages.
The important word in the preceding sentence is "can." Sellers can always elect to sue for actual damages - the amount the buyer's failure to perform cost them. They can also sue for specific performance, which means a judge orders the buyer to proceed with the purchase regardless of the impediment.
Sellers have these options, but litigation is costly and perilous. Most often, sellers will accept the earnest deposit as compensation for having lost some of their marketing momentum in an aborted transaction and then move on.
In most cases, the buyer's earnest money is not at risk. If the buyer cancels the contract for a reason provided for in the contract - inspection or repair issues, inability to qualify for a loan or to obtain hazard insurance, failure of the home to appraise, etc. - the earnest deposit is refunded to the buyer.
The earnest money will be forfeited to the seller only if the buyer fails to proceed with the purchase after all contract contingencies are removed. If I'm representing the buyer, one of my most important jobs is to make sure this does not happen.
And if I'm representing the seller, the ideal state is to make the earnest deposit non-refundable at some point in the process, often when all the repair issues are resolved. My goal is to minimize the risk to the seller, after all.
So how much earnest money should you offer or accept? That's a complicated question...
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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