There are over 50 separate terms you can negotiate in Arizona’s Residential Resale Real Estate Purchase Contract. One of them is the amount of earnest money the buyer will deposit with an escrow company while the sale is being processed. And, like with any term that can be negotiated, the more you know about earnest money, the better.
We’ve already gone over “who” is involved in the exchange of earnest money, so let’s move on to the what, why, how, when, and where of earnest money.
What is earnest money?
Wikipedia says the definition of earnest money (i.e., earnest payment, good faith deposit, etc.) is “a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the purchase.” The Arizona Purchase Contract further states that, “in the event of a dispute between Buyer and Seller regarding any Earnest Money deposited with Escrow Company, Buyer and Seller authorize Escrow Company to release Earnest Money pursuant to the terms and conditions of this Contract in its sole and absolute discretion.” As you can see, earnest money can be explained in many different ways. I think of it as a portion of a buyer’s total cost to close escrow being held for later use. As long as the buyer completes the purchase as agreed, the earnest money is credited back to him/her on the HUD-1 Settlement Statement.
Why is earnest money collected?
As the definition from Wikipedia above suggests, the amount of earnest money a home buyer offers can indicate how serious he/she is about wanting to purchase the property in question. Earnest money gives a seller some peace of mind that the buyer isn’t likely to try to walk away from the contract on a whim the day before escrow is supposed to close. And, if the buyer does walk away without a valid reason, the seller may accept the earnest money as damages. There are many valid reasons a buyer may cancel a Purchase Contract, though. Your REALTOR® should discuss at least the five most common reasons before you enter into your next contract.
How much should an earnest deposit be?
In faster-paced, seller’s markets, I’ve seen buyers offer as much as 5% – 10% of the purchase price in earnest money. In slower, buyer’s markets, I’ve seen buyers offer just $500 – $1,000 in earnest money. I’ve noticed most buyers here in Arizona offer an average of approximately 1% of the purchase price, but as I always point out to our clients, you don’t necessarily want your offer to look “average” to a seller. In the article, “17 Ways to Get Your Offer to Buy a House Accepted in a Seller’s Market,” Doug Hill suggested offering more than 1% of the purchase price to show you’re financially strong and serious about buying the home.
When does the buyer have to deposit the earnest money?
Time is of the essence in the performance of the obligations described in the Arizona Purchase Contract, but deciding exactly when home buyers need to deposit their earnest money usually depends on whether they are buying a short sale. Either way, the deposit should be made with available funds (e.g., personal check, Cashier’s Check, wire transfer, etc.).
In a short sale transaction, Arizona’s Short Sale Addendum doesn’t require buyers to deposit their earnest money until they’ve been give notice of the approval of the short sale. This is an important distinction because most short sales are not approved until several months after the buyer’s initial offer is made.
However, in a traditional sale, a home buyer should attempt to deposit the earnest money with the agreed-upon escrow company within 24 hours of having an accepted contract with a seller. If the final terms are accepted late on a Friday evening, and the agreed-upon escrow company isn’t open on weekends – most Arizona title/escrow companies aren’t – then most sellers will understand if the earnest money isn’t deposited until Monday. Check with your REALTOR® to be sure.
Where is earnest money held?
In some states, like New York, the earnest money may be held in escrow by the listing broker. On the contrary, in Arizona, the earnest money is usually held by a neutral escrow company.
Over the years, I’ve seen home sellers make all sorts of additional requests regarding earnest money, too. Currently, some banks selling homes are requiring a copy of each buyer’s earnest money check – not the actual check, mind you – be included with the buyer’s initial offer. I have no idea what these banks think a copy of a check proves, but hey, if it makes them feel better… Some new construction builders have even required buyers who say they are going to make large down payments (usually above 20% of the purchase price) to provide a copy of their most recent bank/investment account statements proving they have the funds available at the time of the offer. Whatever you agree to, be sure to discuss it first with your REALTOR® and/or real estate attorney.
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