By Travis Close, ABR, GREEN, GRI, e-PRO
President, Greater Chattanooga Association of REALTORS®
When purchasing real estate, the buyer provides a good faith deposit known as “earnest money.” The buyer offers the deposit to secure their performance of the contract. Earnest money is applied at closing toward the purchase price. Another way to define these monies is the commitment on behalf of the buyer to try in earnest to meet the terms and conditions outlined in the contract to purchase the property. It seems pretty straightforward. Yet, questions about earnest money are some of the most common about real estate transactions.
What’s the standard amount of earnest money? The amount of the earnest money is negotiable between seller and buyer; however, it is generally proportionate to the price of the property. A general rule of thumb is at least one percent of the purchase price. Larger earnest money deposits show that the buyer is serious about the property, perhaps a better risk than other potential buyers, and can enhance a buyer’s offer in multiple offer situations. A smaller earnest money deposit doesn’t necessarily, but might, indicate a less serious buyer or their financial ability to complete the purchase. Another consideration is whether the property is an existing home, builder’s spec home or new construction. When the seller is a builder, it is common to negotiate as much as up to twenty percent of the purchase price.
Who holds the money? That, too, is negotiable between the parties and will be specified in the contract. When a REALTOR® comes into possession of earnest money, the rules of the Tennessee Real Estate Commission (TREC) require that the real estate broker deposit the earnest money in an escrow account or trustee account promptly upon acceptance of the offer, unless the offer contains a statement such as “Earnest money to be deposited by: . . ..” Usually the listing broker (or selling broker if there is no listing broker) will hold this money in an escrow or trustee account until closing. If the contract authorizes the broker to place funds in an escrow account, the broker must specify in the real estate contract the terms and conditions for disbursement of such funds and the name and address of the person holding it.
Can I use a postdated check? TREC rules prohibit payment of a deposit or earnest money with a postdated check, unless provided in the offer.
How and to whom is the money disbursed? As stated in the Tennessee Association of REALTORS® contract form, “Holder shall disburse Earnest Money only as follows: (a) at closing to be applied as a credit toward Buyer’s Purchase Price; (b) upon a written agreement signed by all parties having an interest in the funds; (c) upon order of a court or arbitrator having jurisdiction over a dispute involving the Earnest Money; (d) upon a reasonable interpretation of the Agreement; or (e) upon filing of an interpleader action with payment to be made to the clerk of the court having jurisdiction over the matter.” Additionally, the form requires that “Earnest Money shall not be disbursed prior to fourteen (14) days after deposit unless written evidence of clearance by bank is provided.”
To ensure that there are no unforeseen surprises, review the purchase contract carefully. And take a look at Real Estate Deposits: Part 2 of 2, where we will cover additional topics related to earnest money, including interpleader and the seller’s rights when the check bounces or the contract fails. As with all other aspects of purchasing or selling a home, your REALTOR® can help guide you through the process.