What Is Earnest Money and How Does It Work?

Earnest Money is the real estate industry term for what is essentially a good-faith deposit. While it doesn't necessarily have to be money (technically, any item of suitable value, such as a car, an elephant, or your Mother-in-Law), it almost always is. It is money that you, the Buyer, include up-front with your initial offer. It demonstrates both your commitment to buying the home, as well as your financial ability to do so. In effect, you're saying, "I am entering into a contract with a serious commitment, and here is my money to prove it."

When the transaction closes, the amount of the Earnest Money can be applied to closing costs, down-payment, or returned to you in cash, depending on your preference. Generally, Ftce math the Earnest Money (EM) is expected to be about 1% of the offering price of the home. In more competitive markets, I've seen that figure rise closer to 2-3%, though that is usually in the case of multiple bids, when you need to make your offer stand out above the rest.

Most often, the Earnest Money check is handed over to the Buyer's Agent at the signing of the initial contract (aka Purchase and Sale Agreement), then deposited into an Escrow account upon acceptance of the offer. With certain exceptions, the Earnest Money check is made out directly to the Escrow company, as opposed to the agent. The agent delivers the check, but never has direct control over the actual funds. This is important to remember, as it can feel a bit awkward to just hand over a check for several thousand dollars, especially if you haven't known your agent very long. It helps if your agent writes interesting and educational blogs for you to read ahead of time, thus establishing credibility and a professional comfort level you might not find elsewhere.

These rules, of course, vary by state, so be sure to ask your agent. My license is in Washington, so I can't be sure you can actually put your mother-in-law up as Earnest Money in, say, Vermont. However, Vermont is really far away, so you could probably just put her there for just about any reason and still achieve the quiet, stress-free holiday atmosphere you've always dreamed of. I, personally, don't even HAVE a mother-in-law...but if I did I think she'd be quite happy in Vermont. I'm told they have some pretty good syrup there...My imaginary mother-in-law is a big syrup fan.

Rob LeRoy is the Marketing Director at Dwellings Seattle Real Estate and Property Management in Seattle, WA. He has been an active real estate agent in Washington since 2004, and currently works as a freelance Internet Marketing Consultant with real estate agents and small businesses across the country. For details about rates and availability, Rob can be reached at 206.883.6668 or by e-mail at [mailto:rfleroy@gmail.com]rfleroy@gmail.com

Visit the Dwellings Seattle Real Estate and Property Management website here: http://dwellingsseattlenews.com/

Visit Rob's real estate blog, The Real Estate Novelist, here: http://www.therealestatenovelist.com/