It is used to demonstrate that the buyer is serious about buying the property, and it also acts as a form of insurance in case the sale fails.
For the seller, earnest money represents a sense of security, as they know that the buyer is committed and has a financial stake in the transaction. For the buyer, there are two main advantages to paying earnest money: it helps build confidence and prevents them from being locked into a contract without any way of getting out.
To use earnest money in a real estate transaction, buyers must make a deposit on the sale before any documents are signed. This deposit is usually made to an escrow account or an attorney, and is typically equal to 1-2% of the purchase price. Once the transaction is finalized, the earnest money is used to help pay closing costs or other fees associated with the purchase.
If the transaction goes through, the buyer will get their earnest money back, minus any applicable fees. However, if the buyer backs out of the sale for any reason, they may forfeit the earnest money. This is why it’s important to make sure both parties understand the terms of the sale before any money is exchanged.
In summary, earnest money is a type of deposit used in real estate transactions in order to demonstrate the buyer's intent and serve as a form of insurance. It is typically equal to 1-2% of the purchase price and is paid to an escrow account or attorney prior to signing any documents. If the sale is finalized, the buyer will get their earnest money back, minus any applicable fees. On the other hand, if the buyer backs out, they may forfeit the earnest money entirely.
This article was contributed on Dec 17, 2023