What is earnest money?

Earnest Money logoEarnest money refers to a home buyer’s deposit on a home that he or she is in contract to purchase.  It’s often called an earnest money deposit, initial deposit, or good faith deposit in Silicon Valley.  The terms are all interchangeable.

How much is the earnest money?

In the San Jose & Los Gatos areas, and Santa Clara County generally, the earnest money is usually 3% of the purchase price of the home.  It is placed in an escrow account, which is usually at a title company (in northern California that’s how it is handled – in Southern California, often there is a separate escrow company).

Ordinarily, funds are due within 3 business days of acceptance of the contract, but that can be changed (it’s one of the few places where the CAR and PRDS contracts reference business days rather than calendar days). Some listing agents will counter back that funds need to be in title the next day after the offer is ratified. Some buyers may request more than 3 days if their funds are coming from abroad.  With competitive, multiple offer situations, buyers should anticipate needing to get the money to title fast and have it ready to go before the offer is presented so that they aren’t at a disadvantage.

Is a cashier’s check required for the good faith deposit?

The initial deposit does not have to be a cashier’s check, however, some listing agents and sellers may request that in a counter offer.  That’s most likely to happen in a very competitive multiple offer frenzy, and unlikely to happen if it’s just one or two bids.

Increasingly, the funds today are wired to title, but in some cases, buyers may instead write a check. For the earnest money deposit, it may be a personal check. (At the end of escrow, it must be either a cashier’s check or a wire to bring the balance of the down payment to title. Both of these are referred to as “good funds”.)  It is important for home buyers to draft the check  correctly (not made out to just “title company”, for instance), and to understand that this isn’t a check that just sits in a drawer.  The check for the initial deposit is cashed by the escrow company as soon as they get it.  Real estate brokerages tend to prefer that Realtors don’t touch the buyer’s funds, so many are encouraging that consumers wire in funds rather than hand a check to a real estate agent.

Phishing and wire fraud is a concern, so when sending funds in electronically it is extremely important to phone the title company and verify the specific instructions.

Does the earnest money count as part of the entire down payment?

Yes, if the buyer is putting 20% down on some real estate, the initial deposit is likely to be 3% and the balance of the down payment will be 17%.  The balance of funds will need to be in escrow a couple of days before closing.  Many lenders will not fund the loan on the property until and unless the buyer’s money is in escrow first.

Can the buyers get the initial deposit back if they change their minds about buying the home?

This is not a “one size fits all” question.  If the buyers have contingencies, it may be possible to back out of the transaction and have the full deposit returned.  If the buyer has written an offer with no contingencies, that may be an uphill battle, and time to consult with a real estate attorney, as Realtors are not qualified nor allowed to provide tax or legal advice.

 

Related Reading:
What is escrow? (on popehandy.com blog)
What do international home buyers need to know about financing a real estate purchase in the United States? (on Move2SiliconValley.com – relocation site)

 

 

 

The initial deposit on Silicon Valley real estate purchase contracts

Dollar LincolnIf you are planning to purchase a home in Silicon Valley, most likely you’ll be working with a real estate professional and together you will use either the California Association of Realtors (CAR) purchase agreement form or the Peninsula Regional Data Source contract (PRDS). Both of them begin with the same basics: who is making the offer, what property is involved, how much is being offered to the home owner and how much is being put down or put into escrow as an initial deposit or good faith deposit.

What is the initial deposit in real estate contracts?

The initial deposit, or good faith deposit, is the amount of money which the buyer puts into the escrow account at the beginning of the transaction. It is usually given in a personal check, which is cashed within a day or two of being brought to the escrow holder (in our area, that’s a title company – in southern California, they tend to use escrow companies or even one of the real estate brokers).  Some home buyers wire in the funds. Either way, unless the boilerplate is changed, the money is due within 3 business days of contract acceptance. (more…)

Writing an Offer in a Multiples Situation? Financing Tips (Part 2)

ten-dollar-billMultiple offers are a joy to home sellers and a nightmare for home buyers.  There are many disclosures warning of the dangers of overbidding and giving away too many rights in the purchase agreement, and rightly so.  You certainly never want to give up that which will make you overly vulnerable (such as no contingencies for financing or property inspection).   At the same time, though, to actually be the winning bidder, your offer must be better than everyone else’s.  Financing terms can really “make or break” your offer.  Today we’ll discuss a couple of those financing terms: the initial deposit  & the increase of deposit (and related issues of liquidated damages and default).

What are financing terms?   They are all the details of how exactly you will pay for the home and get money into escrow.  For example:

  • good faith deposit (initial deposit)
  • increase of deposit (if needed)
  • loan type (conventional, FHA, VA, seller carry?)
  • loan costs (will you pay or are you asking the seller to help pay?)
  • loan terms: are they realistic?
  • is there a pre-approval letter or a pre-qualification letter?
  • what is the total down payment amount? (and % of purchase price)
  • will you provide the “proof of funds” to the seller?
  • will you submit a copy of the check with your offer?

The initial deposit or good faith deposit is the amount of money that you’re “putting down” with your offer.  If your contract to buy the home is accepted, that check will be cashed within a day or two, so make sure that you write one that will not bounce!  In the San Jose area, most real estate agents write the offer such that there are three business days to get that money into the title company (which handles escrow services in northern California most of the time), but make sure you know how many days it is because it can be variable.  It is written right in the contract, so read & understand it.

(Please note that except for the initial deposit, the rest of the contract will reference days, not business days, if your agent is using either the CAR or PRDS purchase agreement form, both of which are standard in Santa Clara County and San Jose generally.)

Smart real estate agents will usually look for 3% deposit when a home sells, preferably in the initial deposit, but possibly part in that first check and the balance in an “increase of deposit”, which normally would happen when all contingencies are removed.  If you are competing against other homebuyers and your deposit is less than 3%, your position is weakened relative to theirs.

Why does the 3% target matter so much?  The reason is that it’s connected to the liquidated damages clause.  The liquidated damages clause is something buyer and seller would need to agree to for it to be enforceable, so in our PRDS or CAR purchase agreement forms there’s a place for buyers and sellers to initial it if desired (and in my experience, everyone does initial for it).  The deposit (and possibly increase of deposit)  is the potential penalty if the buyer defaults on the purchase.  (I’ll speak of defaults below.)

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