Earnest Money Deposits Can Play Pivotal Role in Real Estate Negotiation Strategy

January 9, 2013

By Keith Loria
When getting ready to purchase a home, it’s crucial that homebuyers understand the amount of money involved in the process. While there are numerous financial obligations that need to be taken into account, prospective buyers must also ensure that they have liquid funds available for an earnest money deposit—money that gets deposited into an escrow account if your real estate offer is accepted, or gets ratified by both parties—when they make an offer on a home.

In its simplest terms, an earnest money deposit is a deposit that is handed over to the sellers (or their real estate agent) when a contract is signed and offered to purchase a home. This shows that the buyer is serious about the deal and is willing to “show you the money.”

While there’s no set amount that needs to be offered in an earnest money deposit, it’s important to talk to your agent before making a decision. Eventually, the money will get credited toward your down payment, so choosing an amount that will impress the seller should be taken into consideration.

When preparing an earnest money deposit, be mindful that a low amount may work against you by weakening your negotiating power. On the other hand, a higher earnest money deposit will show that you are ready to make the deal happen.

If you’re making an offer on a home that has multiple offers on the table, the amount you offer in an earnest money deposit becomes extremely important. While there are many factors that come into play in a real estate negotiation strategy, the size of the earnest money deposit can help demonstrate your sincerity and even influence the seller’s decision in choosing your offer over another.

If something goes awry early in the deal, the deposit is usually returned to the buyer without a fuss. Both parties are usually willing to negotiate a fair solution even when things go wrong later in the transaction. However, certain situations may arise when the buyer and seller find it difficult to agree.

To keep problems at bay throughout the transaction, make sure there’s something written about the earnest money deposit in case something huge comes up during the home inspection that would make you want to pull out of the deal. The last thing you want is to lose all the money because the house isn’t what you thought it was.

While there are consumer protection clauses in contracts, you can also lose the money through default. Default can happen when you have deliberately done something that prevents you from completing the transaction. One way to avoid this is to not buy anything too expensive when under contract to buy a home.

Work carefully with a real estate agent to make sure you understand all of the terms of the deal so that you can meet your end of the bargain.

For more information about earnest money deposits, contact our office today.