What is the earnest money deposit in a real estate transaction?

Joel Sandman, GRI
Published on November 14, 2018

What is the earnest money deposit in a real estate transaction?

First-time homebuyers know that they’ll need a down payment if they hope to get a loan.

What they often don’t know is that they will also need cash to use as what is known as an “earnest money deposit” to submit with the offer to purchase when they find the home they want.

This deposit takes its name from its purpose: It shows the sellers that you are earnest about following through with the transaction to purchase the home – you are, in essence, “putting some skin in the game.”

Although the amount of the deposit isn’t set by law, it varies according to region and the real estate customs within that region.

In the state of North Carolina, all contingencies have been removed from the offer to purchase and replaced with the due diligence process.

Due Diligence

Due diligence refers to the period of time that the buyer will perform all of their inspections, appraisal, and survey of the property. The seller will be compensated for this period of time because they are essentially removing the property from the market to allow the buyer to perform their due diligence. This fee is non-refundable unless the seller was found to be in breach of the contract. The buyer is free to walk away from the purchase of the home at any time, if they choose to do so they will only lose the due diligence fee. The reason for terminating the contract could be any number of things, perhaps they were unable to qualify for a loan or their home inspection revealed a major defect.

How Much?

The amount of earnest money and due diligence fee you’ll need to deposit will vary by region and also by homeowner dictates. Several factors should be considered when determining both the due diligence fee and the earnest money deposit. The purchase price of the home and the time the home has been on the market largely drive the amount of money requested for both due diligence and the earnest money deposit.

Like many aspects of the residential purchase agreement, the amount of earnest money to deposit is negotiable so – whether you are the buyer or the seller — ensure that you’ve hired a knowledgeable real estate agent that can counsel you wisely.

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