In most real estate transactions there is a part of the purchase agreement that stipulates the buyer make an earnest money deposit, or EMD. While not required by law, the EMD is a deposit that the buyer provides as evidence of their willingness and ability to perform. This deposit can be any amount that is agreed upon by the buyer and seller and is typically deposited into escrow with the buyer’s broker. The earnest money deposit is ultimately applied to the closing costs of the buyer. The EMD in a purchase agreement, like many other aspects, can be considered an additional negotiating tool. The greater the deposit a buyer puts down, the more serious they appear to the seller. Often in multiple offer situations, a larger deposit can make the difference in the offer that the seller selects.
What is the risk to the buyer?
When you make an earnest money deposit, it is held in escrow until closing or the parties decide to mutually release one another. Many people wonder what the risk is with the earnest money deposit. As you progress through the due diligence period, you must make sure your agent goes over the purchase agreement in fine detail so that you know what is contained in the contract. To break it down, you will typically have several contingencies in the transaction such as a home inspection, well and septic inspection, survey, appraisal, and mortgage approval. In most purchase agreements the buyer is protected in the event you are dissatisfied with the home inspection, you can walk away from the transaction and receive your deposit back. Likewise, if the home doesn’t appraise and you don’t wish to proceed with the deal, you can get your EMD back. Or if something major occurs in your life such as a job loss and the lender denies your loan, you could also receive your earnest money deposit back.
Remember: these scenarios do not necessarily apply to every transaction. You must carefully read the purchase agreement to understand what your options are. It is that contract between the buyer and seller that dictates the entire transaction.
For more information on earnest money deposits and the buying process, contact Wesley & Co. at 810-623-4603
