When putting
a contract on a property, a buyer can usually expect to write two checks to
accompany their contract — an option fee check and an earnest money check.
There is no strict rule about how much each of these checks must be. The amount
of this up-front money is negotiable between buyer and seller. However, the
amount sends a strong signal to either buyer or seller.
A buyer
offering too little in either option or earnest money can indicate they are not
serious or very interested in the property. Perhaps they can’t even afford
it. A demand of too much option or
earnest money from the seller may send the message that they are unreasonable
or mistrustful. The state of the real estate market also influences the amount
of option fee and earnest money.
The option
money is a non-refundable fee that the buyer pays to the seller for the option
to terminate the contract within a specific time period. This option period is
when the buyer may perform inspections. And they have the right to back out of
the contract for any reason before the option period ends. The option fee is
typically anywhere between $100 and $1,000. How much really depends.
If it is a
slow time of year or a buyer’s market, then the buyer may be able to negotiate
a long option period (10-14 days) with a small option fee ($100-200). It it’s a
fast moving, seller’s market or there are multiple offers, the option period
may be three to five days with an option payment closer to $250-500. It’s
actually a small price to pay considering that the seller is taking their
property off the market and is locked into selling, while the buyer has the
option to change their mind and walk away.
The other,
much larger, check that the buyer will write is for the earnest money.
Earnest
money is deposited by the buyer with an escrow agent and it is forfeited to the
seller if the buyer defaults on the contract. These funds are delivered to the
escrow agent after the contract is executed and before three business days are
up.
Earnest
money demonstrates that the buyer is acting in good faith with the intention of
buying the property. The money is held by the title company. At closing, the
earnest money is credited back to the buyer. If the contract terminates after
the option period, the title company will either deliver it to the seller or
return the money to the buyer, depending on why the contract terminated.
Earnest
money is usually somewhere in the range of 1 percent to 2 percent of the
contract sales price. An amount much lower or higher says a lot. Like the
option fee, the amount of earnest money depends on several factors. If the real estate market is slow or the
seller isn’t getting any offers, you might pay less than 1 percent of the sales
price in earnest money. In a busy market, where there is more demand for homes,
you might have to make a bigger deposit than is typical.
On average,
the earnest money deposits that I see in my Dallas office are 1 percent of the
sales price. However, it’s been a busy spring, and right now that average is
slightly higher. In the past month, I’ve seen earnest money range from $2,000
to more than $50,000. Eager buyers are often willing to put significant money
down to show they’re serious. And sometimes the higher earnest money helps them
win the contract in a multiple offer situation.
Understandably,
sellers prefer to see their buyers make a substantial earnest money deposit.
They want the amount to be large enough that the buyers will avoid defaulting.
Sellers typically feel they are the ones shouldering the risk when they take
their property off the market and trust that the buyer will be able to close.
No one wants to spend weeks packing up their home and making moving
arrangements only to have the deal fall through.
If you’re
serious about buying a home and want to send the sellers that message, forget
the personal notes and sentimental letters about how much you love their house.
Show them the earnest money. Preferably a lot of it.
The opinions
expressed are of the individual author for informational purposes only and not
for the purpose of providing legal advice. Contact an attorney to obtain advice
for any particular issue or problem. [where: 75230]
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