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What is Earnest Money in a Real Estate Transaction

Hey how you doing?

I’m Larry Gibbons, president of the Gibbons Group. And today we’re talking about earnest money deposits. An earnest money deposit is a buyer’s good faith gesture to the seller that they are gonna go through with the contract.

So in a real estate transaction, the contract does not obligate the buyer to buy the property because there’s going to be contingencies that the seller needs to meet. But in order for the seller to take the property off of the market, the buyer gives the seller a good faith deposit that enables them to do so. So while the property is off the market, the buyer is giving this deposit and the deposit enables them to get an appraisal, acquire financing, have an inspection, see if there’s any latent default with the properties, et cetera.

An earnest money deposit is gonna be somewhere between 1% and 10% of the purchase price. In most cases, from what I’ve seen, they’re gonna be between 1% and 4%. But if you’re a buyer, the amount of your earnest money deposit does indicate how much you want the home. So in a competitive situation, the greater your earnest money deposit, the greater chance you have of getting the house above other offers. After the offer has been ratified, an earnest money deposit is typically a cheque that is deposited into an escrow account with one of the brokerage firms or the title company.

With an earnest money deposit, a buyer can get that earnest money deposit back if something goes wrong in the contract. For example, if the house does not appraise, if the inspection does not go well, if you can’t agree on an inspection contingency, if there is something wrong with the financing. In those cases, if it’s outlined in the contract, you can get that earnest money deposit back. However if the buyer just decides to not show up at settlement, this might prevent them from getting their earnest money back.

Because it was your good faith deposit that you were going to purchase the property as long as the seller met the contingencies of the contract.