After months of getting ready, you finally have your house on the market, and you quickly find a buyer. Your realtor tells you about the offer and explains that the buyer is offering you full price with $1,000 earnest money.
You are probably very happy that you got an offer of full price, but you may be asking yourself, “What is earnest money?” In simplest terms, earnest money is a good faith deposit by the prospective buyer showing their authentic desire to purchase the home.
Because a home purchase is likely to be the largest transaction during your life, you want assurances that there will be no legal or financial issues. That is why you need a team like our real estate attorneys at Diamond Real Estate Law in McHenry, Illinois to handle your next home purchase.
What Is Earnest Money?
Earnest money in northeastern Illinois is money tendered by the buyer towards the beginning of the transaction to show the seller that they are serious about purchasing the property. The earnest money is usually deposited in an escrow account with the seller’s realtor, attorney or title company.
When the buyer completes the purchase, the earnest money is credited towards the purchase price and usually used to pay part of the realtor’s commission.
In general, the amount of earnest money is usually about 1 or 2 percent of the property purchase price, but it can vary from a few hundred dollars to the full asking price of the home. The purpose of the earnest money–aside from demonstrating the buyer’s good faith—is to offset the financial costs of the seller removing the property from sales listings.
The exact amount of the earnest money should be stipulated in the purchasing contract. This contract normally allows the seller to obtain the earnest money if the deal falls through. It is always a good idea to have an experienced real estate attorney like our team at Diamond Real Estate Law look over or draft such an agreement.
What Happens If the Purchase Doesn’t Take Place?
If things don’t go as planned, and the buyer does not end up purchasing the property, the escrowee or person holding the earnest money will usually need written direction from both the buyer and the seller to release the earnest money.
If the buyer and seller cannot agree on what to do with the earnest money, a court order will usually be required for the escrowee to do anything with the earnest money.
Who gets the earnest money depends on the purchase agreement. In most cases, the seller is presumed to get the earnest money, but if there are contingencies in the contract that allow the buyer to back out of the purchase without penalties, then they may be entitled to the earnest money.
These contingencies may include:
- Lack of financing—if the buyer is unable to secure a mortgage on reasonable terms, then many agreements allow them to renege.
- Structural defect—if the home appraisal uncovers a problem with the property, that is usually sufficient grounds to annul the purchase agreement.
- Title problem—if it is discovered that the seller may not hold the title, the buyer is allowed to withdraw their offer and retain the earnest money.
Trust Diamond Real Estate Law to Manage Your Next Real Estate Deal
At Diamond Real Estate Law, we pride ourselves on working for our clients throughout the northeastern Illinois community. With the help of Adam Diamond and his team, you can rest assured that your next real estate deal will be a resounding success.
Contact Diamond Real Estate Law for a free consultation.
