How Much Earnest Money Should I Put Down?
September 23rd, 2007 Categories: Buying
This is a really great question. I think the more you put the better.
When you are making an offer I am assuming you want to negotiate the best deal possible.
So with that said let’s look at why more EM can help you. For starters, the EM goes towards your down payment or towards your closing cost if you are doing 100% financing.
It shows how serious you are and shows you have some money. This along with good deadlines can help you get a better price as a buyer. The reality is, if you are putting down 3% or more in a total down payment, than there really is no reason, for you not to put a large EM.
Your EM is protected with the basic contingencies of the Standard Board Of Realtors Real Estate Purchase Contract-REPC (pronounced rep-see).
Those basic contingencies are Appraisal, Inspection and Loan. They all have deadlines and you can cancel the contract within those guidelines with WRITTEN NOTICE. If the contract is canceled within the parameters of the contract then the EM is returned to the buyer.
Another reason is called liquidated damages. The default clause of the REPC Paragraph #16
DEFAULT. If Buyer defaults, Seller may elect either to retain the Earnest Money Deposit as liquidated damages, or to return it and sue Buyer to specifically enforce this Contract or pursue other remedies available at law. If Seller defaults, in addition to return of the Earnest Money Deposit, Buyer may elect either to accept from Seller a sum equal to the Earnest Money Deposit as liquidated damages, or may sue Seller to specifically enforce this Contract or pursue other remedies available at law. If Buyer elects to accept liquidated damages, Seller agrees to pay the liquidated damages to Buyer upon demand. It is agreed that denial of a Loan Application made by the Buyer is not a default and is governed by Section 2.3(b).
So a large EM benefits you as a buyer all the way through, as long as you monitor your dates and everyone in the transaction stays on task and on time, your money is not at risk.
In summary, a larger EM along with good deadlines can help you negotiate a better price and in the event the seller defaults you awarded a larger damage settlement.
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