WHAT IS EARNEST MONEY?

You've probably heard the term "earnest money" and wondered what it meant or how it worked.

What is earnest money? Earnest money is the amount you give to the seller to show you are earnest about your intent to purchase their property. After all, if they are going to remove their property from the active market they will want assurance from you that they are not wasting precious time.

When do you pay earnest money? The check is written at the time the contract offer is made. In Texas, the earnest money check is written to the title company whom you have chosen to provide the title insurance and handle the transaction. When all parties to the transaction (buyers and sellers) have agreed to all contract terms and signed or initialed where necessary and the contract has been executed, the earnest money check will be cashed and deposited with the title company in an escrow account. The money will be credited to the buyer at closing.

How much is the earnest money? Customarily, it's 1% of the purchase amount but sometimes the buyer writes it for less. The higher the figure, the more impressed the seller will be when evaluating multiple offers.

What if you decide not to buy the house? Traditionally, you forfeit the earnest money if you decide not to buy but in Texas we have written into our contracts an "option period" clause that allows you a limited amount of time to withdraw your offer and get the earnest money back. Both parties and both agents must sign a release for the earnest money to be returned to either party.

What if there is a dispute about who should receive the earnest money when an offer is terminated? In Texas, the contracts suggest you first seek mediation before litigation. Recently, I attended a luncheon with a guest speaker from DRC Dispute Resolution Center in Austin. He mentioned that the most common dispute they see relates to earnest money in real estate transactions. To learn more about mediation see my blog entry from July 11, 2008 "Mediation/dispute Resolution." The other option would be to contact a real estate attorney.

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