So what is earnest money? When a buyer makes an offer on a home, they will also include a monetary figure called “earnest money” or a “good faith deposit” in the written purchase contract. The actual money is not needed at the time the offer is submitted but should be spelled out in the offer and deposited to the escrow company soon after a contract has been accepted and signed by both parties. What most people don’t know is, earnest money is not required in Arizona, but it is customary and expected by sellers. Buyers do this to show good faith that they are serious about purchasing the seller’s home. I always tell my buyers, not to expect their offer to be taken seriously without it.
In my area, the most common amount for a buyer to put down as earnest money is at least 1% of the purchase price. But it varies depending on many factors. Your real estate professional can discuss with you regarding what is an appropriate amount as a good faith deposit for your situation.
In a multiple offer scenarios, some sellers determine the winning bid based on a number of considerations and the amount of earnest money can be a possible factor. For example, if two offers are submitted at the same time that appear relatively the same, except the only difference is the earnest money, then of course, the seller will look at the one with the highest dollar amount of earnest money. Now, this money is held by a third party and not the seller. It doesn’t just go into the seller’s bank account. Instead, it’s held in an escrow account by the escrow company. They are a neutral party and will execute the transaction according to the terms of the contract. NOTE: The funds will be cashed so be prepared.
Some buyers get concerned that this money is at risk if something goes wrong. The honest truth is, it can be but more often than not, all goes well. Unless of course, you break the terms of the contract. But you and your money, are protected in many ways, and if the deal doesn’t close through no fault of your own, that money will be returned to you. If the deal does close, that money can be applied to the purchase, such as towards your closing costs and/or down payment. In some cases, a portion or all will be returned to you.
There are a number of instances during the transaction where you can cancel the contract and get your earnest money back. While these opportunities are not meant to be taken lightly, it is a safety net in the event you have no choice but to cancel the contract for good reason.
The first opportunity is during the inspection period. In Arizona, you have 10 days from when you go under contract on a home to do your due diligence investigations. Should you discover something about the property that you simply cannot live with, you can cancel before this 10-day period expires. Or if after you submit your repair requests, the seller either is unwilling or unable to accept your repair requests, you can cancel and get your earnest money back. The next opportunity is during the appraisal phase. If the appraisal comes in low and the seller unwilling to reduce the sale price to meet the value or work out some type of compromise, you can cancel under what is called an appraisal contingency. The final opportunity is if your loan is denied despite your best efforts to get approved. You can cancel under what is called an unfulfilled loan contingency. All of these situations have time sensitive deadlines that you, as a buyer, must adhere to in order to receive the earnest money refund per the cancellation terms in the contract so do keep that in mind.
I am happy to explain all of this information in more detail with you. Insight about the home buying process is included in my Buyer Guide. Contact me to get a copy emailed to you right away.