When a home buyer makes an earnest money deposit, it shows their intent to purchase. They do it to establish trust or “good faith” that they will complete the agreement, and to prevent other offers on the property. The deposit also gives the buyer time to finish any approval processes necessary for a loan, get a property appraisal, and have inspections and any other reports done before closing. They get the information they need to see if they’re buying the right property and to close the deal.
An earnest money deposit is often from one to ten percent of the purchase price. The deposit goes into a trust or escrow account which is held until everyone meets all of the escrow agreement requirements, or unless one party backs out of the deal. Typically an attorney, title company or realtor will hold the escrow in trust for the transaction. Escrow is often done on the condition that no one will be paid or get the title to the property until all the parties involved have agreed to the conditions of the purchase. They will often have negotiated an agreement that the escrow agent must verify has been satisfied before release of any funds.
The buyer should get a receipt that clearly states the purpose of the deposit. The escrow agent, usually your attorney, the seller’s attorney, the title company, or one of the real estate agents involved, will hold the money until the closing date. At that time, the earnest money deposit will give the buyer a credit toward the purchase price and closing costs.
Closing the Real Estate Deal
On the way to closing, buyers and sellers don’t always agree on the terms of the transaction or the escrow funds, so it helps to negotiate alternatives to reach a successful outcome. The contract should specify how the escrow agent will handle the earnest money deposit in case something goes wrong. For example, it can state that if the buyer doesn’t complete the deal, the seller will keep all or part of the money and that if the seller backs out, the buyer will get a refund.
Meanwhile, the escrow agent, who has a fiduciary duty to act without an interest in the transaction and abide by state law, will keep the deposit until any disputes are resolved. Otherwise, if the escrow agent fails to act appropriately, he or she can be held liable for breach of their duties.
The escrow holder ensures that all terms and conditions of the sale agreement are met before closing. They receive funds and documents, complete required forms, and get releases for any loans or liens paid with the transaction, giving the buyer a clear title to the property.
Once everything is complete, the closing can take place. At this time, any outstanding payments and fees are collected, covering expenses such as title insurance, inspections, and real estate commissions. The buyer then gets the title to the property and the deposit is applied towards the purchase price and the transaction is closed.
At Kleiner Law Group, we can guide you from negotiation to closing, including performing title searches and handling escrow. For help with your home purchase, contact us today.