So what is “Earnest Money” anyway?

If you’re buying or selling a house, you’re bound to come across the term “Earnest Money”.  What is it?  How does it work?

First of all, it’s not this guy:

ernest moniz

That is Ernest Moniz, former Secretary of Energy.

In addition to being confused with “Earnest Money”, Ernest Moniz is also frequently confused with being a Founding Father:

But I digress!

Let’s get serious for a moment.  Earnest Money is money paid by the Buyer to show they are serious about their offer to purchase the property.

Earnest Money is typically paid at the time the Buyer’s offer is accepted by the Seller, and it’s typically paid to the Seller’s attorney or real estate agent.  The money is typically held in trust by the attorney or agent and then applied at closing.

Since the buyer has already paid the earnest money, it reduces the amount the buyer needs to bring to closing.

What is common?

There is no requirement on how much Earnest Money is required.  In the Des Moines real estate market, it’s common to see Earnest Money in the range of $500-1,500, for the average sized homes.  For larger homes, larger Earnest Money is often seen.

Is It Required?

There’s a misconception out there that Earnest Money is required.  It is not.  Some people will claim Earnest Money is required in order to form a binding contract.  They’re referring to the legal concept that a contract must have “consideration” from both sides to be valid.  While that’s true, payment of Earnest Money is not needed to establish consideration.  The basic promise to purchase from the Buyer, and promise to sell from the Seller, form sufficient consideration to establish a binding contract, without the need to add Earnest Money on top.

That said, while it’s not required, it is commonly included and from a Seller’s perspective is a good idea.  It establishes the Buyer is a serious buyer, and in the event the Buyer were to breach the agreement and refuse to close, the Seller may be entitled to retain the Earnest Money.  Each situation is different and you should consult with your attorney if you find yourself in that situation.

Purchase Agreement / FSBO

If you’re in the process of buying or selling and need assistance with drafting a Purchase Agreement or with selling your home For Sale By Owner, we’d be happy to help!  Please contact us at the red button above.

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