When you find the perfect home, and you cannot live without it, you may need to show the seller you’re serious. This is especially true in competitive buyer markets and bidding wars. That is when the term “earnest money” gets brought up.
Earnest money is when you send money ahead of time to prove you’re a serious buyer. It can be held either by a licensed real estate agent (the seller’s or your own) or a title company. There are benefits and negatives to both. That’s what we cover below to help you decide who to send the earnest money to and why.
There are three different places you can send earnest money to when buying a home:
- Title companies
- Real estate agents
- The seller
Depositing earnest money to a seller’s account should only be done when you are 100% serious about buying the house. You must feel confident the person selling will actually sell their house to you. When you deposit the earnest money directly into a seller’s bank account, you run the risk of losing that money or having it tied up in limbo. If the deal falls through and it is stuck in their account, you will not have it available to put towards the next home.
That is why depositing the earnest money into a seller’s bank account is risky and normally not recommended. So let’s look at the other two options. A title company or a real estate agent.
If you send the earnest money to a title company, and they’re also doing your closing or escrow, the seller is going to know you’re a serious buyer. This can help you have an advantage over other offers. When a buyer has the earnest money on the table, they normally have the funds and want to close quickly. This makes life easier for the seller and helps you become the more appealing opportunity. It is especially helpful if you’re stuck in a bidding war.
At the same time, not all title companies are easy to deal with, or can be trusted to send it back quickly if your deal falls through. That’s why some buyers prefer to have it held by a licensed real estate agent. If the deal doesn’t pan out, or the seller is playing games, you can get your money back more easily so it can be used to make an offer on a different home or property. You just need to hope that if it is the seller’s agent, they won’t play games and will send it back quickly.
Another benefit to having a title company hold your earnest money, and handle the closing services, is that they can more easily transfer it to the deposit on the home once you and the seller have agreed to the terms of the deal. Because it isn’t changing accounts, or going from one company to the next, it is normally a much quicker and easier transfer. Some title companies have also gone paperless to streamline their processes, meaning they can do this almost instantly through their computers on the spot.
Risks With Sending Earnest Money for Buying a House
There is a big risk for you as the homebuyer when sending the earnest money. If you back out of the deal once the contracts are on the table, you may lose your earnest money. To help reduce the risk of losing your earnest money, you must have “valid cause” which is covered and detailed in the contract.
What justifies valid cause will be decided in your contract and must be agreed upon before you sign. They are the only reasons that will allow you to walk out of the deal and at least one must be met if you want your money back. When creating the valid cause section of your contract, make sure to include items about inspections or if the house has issues from infestations to foundation/structural problems and damage. You can also include items like the seller making modifications or not disclosing certain information before you made the offer or post inspection.
If the title company is holding your earnest money, and you back out of the deal, it will be their decision to return it to you based on the contract and after verifying if there is valid cause. The benefit to you with having a title company hold your earnest money is that you have a third party holding the money and helping to verify the situation. If you deposited the earnest money into the seller’s bank account, it is going to be much harder to get it back.
If the seller is dragging their feet or is unresponsive, you may need to get a lawyer involved. That will potentially cost you more than the earnest money. If the seller knows this, they could try to risk it knowing you may back down. That is why you should never send the earnest money to the seller directly, especially if there is a licensed and trustworthy real estate agent or a reliable title company who can hold it for you.
If you have other questions about earnest money, call us at the number above or fill out the quick form on our title insurance page and we’ll be ready to help.