When buying a home, there are many things to consider. One of those things is called ernest money or intial depsits. Initial deposits are often called 'earnest money' in the real estate world because they're designed to show just how serious a potential buyer is in the property. So instead of just making an offer and waiting for it to be accepted, the buyer follows up the offer with actual cash. For those planning to purchase property in California, there are a few things to know about how earnest money works in different markets.
It's Not Required
Earnest money is not required according to the rules of California real estate, but it is legal to offer to the seller. Technically, California buyers have to put down consideration money with their offer, but this consideration money can be as low as $1. (This is unlikely to be considered 'earnest' in the eyes of the seller.)
Those planning to give earnest money should follow the standard rule of between 1% - 3% of the purchase price of the home, but this is a recommendation only. Some buyers will put down a flat amount of money, such as $1,000, regardless of the price of the home. Experts strongly advise against anything above 3% as this can tie up a substantial amount of money for months.
The extra money can be put toward the eventual purchase of the home, but it doesn't take the place of the regular down payment. Traditionally, initial deposits are given to an escrow organization, so there's less chance of a dispute over the money later on.
It Can Secure the Property
Whether a seller expects earnest money is largely dependent on where the home is located. Many housing markets in California are extremely popular, with multiple buyers all desperate to get their hands on a single piece of land. It's why many sellers may be expecting to see the maximum amount (3%) offered. Buyers who make a show of good faith to the seller will be more likely to leave an impression, which can be the deciding factor for a seller who has to pick one name from many.
There Are Two Ways to Get It Back
Earnest money will go toward the purchase price of the home, unless one of the two events occurs:
- Rejection: A seller that rejects the offer outright will have to give the money back to the buyer.
- Contingencies: The purchase agreement should spell out the contingencies upon which the buyer can cancel the deal and have their earnest money returned.
For example, the San Pedro new home buyer has the right to request a relatively clean home inspection report before they officially go through with the deal. Similarly, if the seller makes a promise to fix the floorboards but ultimately never does, the buyer can stipulate their desire to back out from the deal.
Californians are encouraged to request the standard contingencies for the return of their earnest money but should be careful when making demands. Again, these are competitive markets where sellers may have no issues canceling a deal if they feel the buyer is being unreasonable. If a buyer backs out of deal without a justifiable reason, the seller may be allowed to keep the earnest money as a concession for the wasted time.
Earnest money can be a strong point in a buyer's favor and a relatively risk-free way to secure the home. However, there are real risks for buyers too, so they're encouraged to offer an initial deposit carefully.