Note from Michael: This post and video are the first in a new series called the A.CRE Contract to Close Series. In this series, we’re going to explore all the various things that typically happen, or that should be happening, from the time a PSA (“purchase and sale agreement”) gets signed to the time of closing when ownership of a property is formally and legally passed from one entity to the next. In this post and video, we’re going to go over the earnest money deposit.
What is an Earnest Money Deposit
The earnest money deposit, also known as the good faith deposit or good faith money, is a sum of money that gets deposited by the buyer of a property into an escrow account usually a few days after signing the PSA, or purchase and sale agreement. The money, usually a small percentage of the purchase price, is used as a sign of good faith that the buyer is serious about purchasing the property.
The deposit is held in the account until closing at which point the money is then applied to the purchase price. This means if the purchase price was $100 and the earnest money deposit was $10, the balance due at closing would be $90 and the money in escrow would be released and sent to the seller to complete the purchase.
Is the money non-refundable?
This is always up for negotiation, but typically the money is refundable up until a certain date. Normally, when a PSA has been signed, the seller will remove the property form the market and give the buyer an exclusive review period, also commonly referred to as the due diligence period. During this period, the buyer is provided the time to research the property to ensure he or she is getting the property as advertised. Typically, the earnest money is refundable during this period of time. Upon expiration of the due diligence period, the earnest money then becomes ‘hard’ or non-refundable. It’s also less common, but not unusual for there to be a second earnest money deposit required upon the expiration of due diligence. This second deposit is typically non-refundable upon deposit as at this point, the free look period, or due diligence period, is over and the transaction moves from the due diligence phase to the closing phase.
Who holds and manages the earnest money deposit
The earnest money deposit should be held by a neutral third party that is usually an escrow agent. Typically, the title company working on the transaction will double as the escrow agent. The agent will only release the funds once the obligations have been met according to the PSA and upon the written instructions form the seller or seller’s attorney.