Lighthouse Talks Shop: Will Litvin on Earnest Money Deposits
One of the most surprising parts about working in real estate is finding out how this job is not really just a job, but a lifestyle! So many people are personally interested or invested in local real estate—they own a home, they want to own a home, or they want to sell one. It’s an industry that impacts almost everyone we talk to! In this Zillow-obsessed age, it seems that people have instant access to a ton of real estate information, but as we make our way through conversations with our families, friends, clients, and people next to us in line for coffee, we notice that folks still have questions, and sometimes, misconceptions about buying and selling real estate. There’s nothing we love more than ‘talking shop,’ so this post will be the first in a series dedicated to just that—we want to talk to you about the business we know and love best and answer your questions for you!
Today, on behalf of potential buyers everywhere, we dive into the EMD—the earnest money deposit. This is the money that you present to a seller when you make an offer on a property, and it can be the source of many questions. How much to give? When? And where does it go? Why is it important? What if something goes wrong with the transaction? Do you get that money back?
Will Litvin, principal broker and co-owner of Lighthouse Real Estate Group offers his insights here:
First off, basics! What is an EMD? When is it delivered, and where does it go?
An EMD is the buyer’s deposit on a property. In Rhode Island, the buyer’s total EMD is identified on Page 1 of our Purchase & Sales Agreement and separated into two separate deposits delivered at 2 separate times.
1. Initial Deposit: This is typically the check handed over with a buyer’s initial offer. The amount is traditionally can range anywhere between $100 – $1000.
2. Additional Deposit: This is the balance of the total agreed upon EMD and typically handed over after the parties sign the sales agreement. This would typically be accepted in the form of either a personal check, bank check, and/or bank wire.
This money is given to the listing broker, who deposits it into a separate escrow account at the time the transaction is consummated (that is, when the sales agreement has been signed by the parties and circulated).
Why is an EMD necessary?
An earnest money deposit in a real estate transaction effectively serves two purposes.
The “initial deposit” (that’s the $100 – $1000 that goes in with your offer) confirms the validity of the contract. Essentially it says, “Hey Seller, I’m a real buyer! I have a heartbeat, and a real checking account–here’s a small check to prove it!”.
Secondly, the balance of the total EMD acts as a show of a buyer’s “good faith” in the transaction. This larger check, typically delivered once the parties come to an agreement, communicates, “OK Seller, I’m serious about seeing this transaction through. Here’s some $$ to tie up while I do inspections, obtain my mortgage, have title work done, etc.” Sellers know that by signing a sales agreement, they are taking their property off the market, and want comfort knowing the buyer has some ‘skin in the game’ as the transaction moves through the escrow period and navigates through the contingencies of sale, if any.
Who determines how much of an EMD is appropriate?
Here’s where things get more complicated. In essence, a buyer’s total EMD can be ANY AMOUNT that is acceptable to both buyer and seller in order for the parties to be willing to sign a sales agreement. There does exist a “traditional amount” in our market, whereas the buyer’s total EMD would ideally be in a range of 3-5% of the purchase price. Sound out of reach? Keep reading!
There are many scenarios that may affect an EMD amount. Keep in mind that a buyer’s EMD is in essence “tied up” during the escrow period, so buyers may not be able to remit 3-5% right off the bat. And what if a buyer is obtaining 100% financing via USDA, VA, or RIMFAC? They may not have 3-5% liquid funds available for an EMD! Alternatively, there could be multiple offers submitted on a single property, and a buyer is in competition with others—in this case, offering a higher EMD may position one as the strongest offer. Another scenario—perhaps EMD funds are not immediately available at time of signing the sales agreement and need to be moved from a brokerage or investment account? Or coming over via a tax-deferred 1031 exchange?
This is where a skilled Realtor can assist by helping their client (buyer or seller) navigate the specific situation to ensure EMD amicability on both sides.
How is a buyer’s EMD refundable? Or if I’m a seller, can I keep the buyer’s EMD if they bail from the transaction?
Yes and no, and yes again, well…maybe??? Here’s the fact, a buyer may unilaterally terminate a transaction with no recourse and a FULL RETURN of all EMD funds held in escrow ONLY if such termination is allowable via a contingency of the sale built into the agreement. Remember your skilled Realtor representing you in this transaction? There are many factors affecting which contingencies buyer and seller may agree making a transaction subject to (some typical contingencies of a sale may include: inspections, mortgage, title, sale of another property, etc.). Many buyer-protective contingencies are automatically built into our sales agreements (such as seller conveying property with clear and marketable title free of liens). However, there is no rule regarding what contingencies, if any, a transaction may be subject to, so it is of utmost importance to work with your Realtor to navigate this very important topic. The refund-ability of a buyer’s EMD sits in the balance!
Wait, what about the EMD vs. down-payment? Are they different?
There is often confusion between the buyer’s EMD and their total “down-payment” (only if the property is being financed). The EMD only a portion of the total down-payment required by a lender with the balance of required down-payment, along with closing costs, not due until the closing. Please keep in mind that for mortgage-financed properties, the buyer’s lender will want a “paper trail” of all deposits, so it’s important that the source of the buyer’s EMD should be able to be traced. On the final settlement statement (now referred to as the “Closing Disclosure” Statement), the EMD will be shown as a credit toward the remaining down-payment.
Last thoughts from Will:
I hope this post helps buyers and sellers fully understand the ins and outs of the Earnest Money Deposit. Obviously, a discussion on EMD’s overlaps into many other facets of a real estate transaction that we will surely be touching upon in future blog posts. Please reach out to us with any questions. Whether buying or selling, our skilled team of local Realtors here at Lighthouse Real Estate Group offers our clients the comfort, knowledge, and empowerment to successfully navigate their real estate goals! We welcome the opportunity to work with you!