BOSTON CONDO BUYERS: WHAT IS AN EARNEST MONEY DEPOSIT?

Boston Condos for Sale and Apartment Rentals

BOSTON CONDO BUYERS: WHAT IS AN EARNEST MONEY DEPOSIT?

For many Boston condo buyers, purchasing a condominium can seem quite daunting. The transaction involves paperwork, moving parts, and legal and real estate jargon being thrown around that can often feel totally foreign. Throughout the Boston condo buying process, we get countless questions from clients as we guide them step-by-step and make sure that they are comfortable and understand the process. One of the more frequently asked questions we receive from clients and prospective home buyers is, “What is an earnest money deposit?”.

An earnest money deposit, also referred to as an EMD or just simply a deposit, is money that is given from the buyer to the seller, after having an offer accepted, to show the seller they have good faith in the transaction. The deposit demonstrates to the seller that you have “skin in the game” and are committed to the transaction. The deposit is then held in an escrow account until the transaction is closed, at which point the deposit is applied to the down payment.

So why is a deposit necessary?

So why is a deposit necessary? To really understand why an earnest money deposit is important, think about it from a seller’s perspective. By accepting a buyer’s offer and taking their Boston luxury condo off the market, they are no longer advertising the home and may be missing out on opportunities from other buyers.

A seller would not want to, or at least, would be much less likely, to accept an offer with no deposit because there is nothing committing that buyer to see the transaction through till the end. A buyer who is making offers with no deposit could make a bunch of offers on all different properties and just wait to see which ones get accepted and then choose from there, with no penalty or loss on their end. This would end up wasting a lot of time for those involved and would leave the seller in a position of having missed potential opportunities and needing to start from square one.

When considering the deposit in an offer, many condominium buyers are concerned about the risks involved with a deposit. A real estate purchase agreement is a legally binding contract and does carry with it some risk. However, there are contingencies in place that help to protect the buyer and minimize the risk of losing your deposit. These contingencies are standard in most contracts and a buyer has a right to them unless they choose to waive their contingencies, which is not advisable unless you are fully aware of what you are getting yourself into.

Every real estate transaction is different so to make sure that you are protected in the agreement, have your agent or an attorney review the documents. In most cases, the buyer is able to get a full refund of their deposit

Is your earnest money safe?

I get asked questions about earnest money all the time. Recently I encountered a situation where the home buyer was worried that the earnest money would be stolen. Your earnest money is safe.

Earnest money is a deposit made by the buyer. It is held in a real estate broker’s trust account until the sale closes. The purchase agreement spells out who will get to keep the earnest money if the buyer fails to close.

A home can be purchased without earnest money if both parties agree.

Earnest money does not go to the seller. The most common practice is earnest money held by the seller’s broker. The money is usually electronically sent directly to that trust account and there are all kinds of rules and laws governing trust accounts.

Ultimately the money goes toward the purchase price. It will show up on the settlement statement as a credit.

The amount of earnest money depends upon the price of the house. A larger earnest money deposit can make a buyer’s offer look better to a seller. It shows that the buyer is committed to the purchase.

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