What Happens to the Earnest Money?Earnest money - that illusive phrase that many first time home buyers are unaware of.  The term "earnest money" is a good faith deposit given by the buyer to the seller to let the seller know that the buyer is so serious about buying the property they are willing to put money on it at the offer stage. This is a type of deposit that "holds" the property for the buyer. The earnest money deposit is typically 1% to 3% of the purchase price of the property but can be as little as $500. Legally, earnest money can be any type of collateral including an IOU, personal property, land or cash. However, in today's real estate world, writing a check or having a cashiers check for around $1000-$5000 is the most common type of earnest money deposit. Very few sellers will accept anything other than a cash earnest money deposit.

The earnest money is something that buyers will need to have upfront and present with the offer. Now, the money is in the form of a check so it doesn't actually get deposited or removed from the buyers account until mutual acceptance occurs. When your agent writes up an offer, listed in the contract will be the amount of the earnest money, let's say $1000. The buyer will write a check for $1000 and attach a copy of that check to the offer proving that they have in fact written the check. The check does not go to the listing agent or even to the seller but the buyers agent will hold onto it until mutual acceptance occurs. From there, the check will then be deposited into the buyers agents brokers account to be removed later at closing or with the title and escrow company, which is more common.

Related: How much do you really need for the Earnest Money?

During negotiations that earnest money check is not deposited. Only when both the buyer and the seller agree to all the terms in the offer does the check get deposited. Once mutual acceptance occurs the transaction moves on to subject to inspection and then to pending. That earnest money deposit will go towards the purchase of the property at closing.

What if it needs to be returned?

The earnest money deposit is a type of security for the seller. Should the buyer backout of the transaction without reputable cause, the earnest money could go to the seller. This is extremely rare however, because most buyers will have a reasonable reason to back out of the transaction, either by financing falling through, and inspection not being approved or other contingencies not being satisfied. If the buyer simply says, "I just don't want to buy the house anymore." Without allowing the buyers agent to find a good reason, they will probably lose their earnest money deposit. The seller will now have to remarket and relist the property and has lost time on the market and this is their compensation.

At closing, this earnest money deposit will be added to any down payment and deducted from the total purchase price of the property.

For more information about closing, escrow or all Portland real estate, please contact me anytime.