Everything you need to know about earnest money

On Behalf of | Feb 3, 2021 | Real Estate Transactions |

Buying or selling a home in Louisiana is a big deal with a lot of money involved. It makes sense that both parties want to protect their investment in any way that they can. One way to do this is through earnest money. What exactly is earnest money, and how does it benefit both buyers and sellers?

Earnest money is…

Earnest money, sometimes referred to as good faith money, is essentially a deposit on the home. It is the buyer’s way of showing the seller that he or she is serious about purchasing the property and a seller’s way of protecting him or herself should the buyer back out of the sale for any reason not permitted in the purchasing agreement. The amount of the deposit is usually 10% or less of the purchase price, but the final amount may be negotiable. In the end, any amount put down is applied toward the downpayment or closing costs.

Where is the money held?

Good faith money goes into an escrow account. It is not paid directly to the seller. A title company, real estate brokerage or legal firm then holds the funds until they are ready to be paid out. Earnest money may be paid by wire transfer, certified check or personal check — the firm holding the escrow account may require it be paid a certain way.

Is it refundable?

Yes, the earnest money is refundable, but only in certain circumstances and if certain contingencies are included in the contract. For example, if appraisal and inspection contingencies are included in the contract and the appraisal comes back below the purchase price or the inspection report reveals issues with the home, the buyer may back out of the sale and have the deposit returned. It is not refundable if the buyer simply chooses to break the contract or fails to abide by the timeline or other conditions outlined in the agreement.

Earnest money can be a good thing for both buyers and sellers. The key is making sure the purchasing agreement includes all the right contingencies and conditions. Those looking to buy or sell property in Louisiana can have legal counsel review or negotiate the terms of the purchasing agreement so that it offers their desired protections.