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 it, the better.
We’ve already gone over “who” is involved in the exchange of earnest money, so let’s move on to the what, when, where, and how of 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…made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the transaction.”
When the sale closes, the earnest money is credited to the buyer on the Settlement Statement, which the buyer can use to pay his/her closing costs. If the sale falls through, the earnest money is refundable back to the buyer depending on the reason why it fell through. For example, a buyer can usually get the earnest deposit back if he/she cancels within the previously negotiated Inspection Period. On the other hand, a seller might be able to keep the earnest money if the buyer breaches a contract term. A common buyer breach is failing to close on the agreed upon date.
There are many valid reasons an Arizona buyer may use to cancel a Purchase Contract and get a full refund of the earnest deposit. You and your REALTOR® should go over the most common reasons for cancellation before you enter into a contract.
Time is of the essence in the performance of the obligations described in the Arizona Purchase Contract. Determining exactly when a home buyer needs to deposit the earnest money depends on a few factors.
In a traditional sale, a home buyer should attempt to make the earnest deposit with the agreed upon escrow company within 1 business day of contract acceptance. Contract acceptance occurs on the date that the signed contract (and any incorporated counter offer) is received by the appropriate broker. If contract acceptance occurs late on a Friday evening, then sellers should understand if the earnest money isn’t deposited until Monday since most Arizona title/escrow companies aren’t open on the weekends. Check with your REALTOR® to be sure.
In a short sale transaction, Arizona’s Short Sale Addendum gives buyers permission to wait to deposit earnest money until the seller’s creditors approve the terms of the sale on a separate short sale agreement. This is an important distinction because most short sales are not approved until several weeks (sometimes months) after the buyer’s initial offer is made.
Either way, the deposit should be made with immediately available funds (e.g., personal check, Cashier’s Check, wire transfer, etc.).
In some cases, earnest money can be held by the listing broker until closing. However, the earnest money in Arizona residential resale transactions is usually held by a neutral third party identified on the purchase contract in the Title and Escrow section. Like many clauses in a purchase contract, choosing the title/escrow company is negotiable. If the seller insists that a particular title company be used, then the seller must pay for the owner’s title insurance policy and cannot require the buyer to use the same company for the buyer’s lender’s policy (unless the buyer is willing).
Our Purchase Contract explains the importance of the title/escrow company selection in the Release of Earnest Money section: “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.”
Often, it is a percentage of the full purchase price. The Arizona REALTORS® Blog observes that “most earnest money deposits are fairly modest and likely be found to be an acceptable amount of liquidated damages.” 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. In my experience, most buyers here in Arizona offer approximately 1% of the purchase price.
In our blog post, “17 Ways to Get Your Offer to Buy a House Accepted in a Seller’s Market,” we provided a list of strategies buyers can use to make their offers more attractive to sellers. One of them is to offer an earnest money deposit that is greater than 1% of the purchase price if you want to appear financially strong and serious about the home.
Offering earnest money in Arizona is an important step in the home buying process. Now you should have a better understanding of what it is and how it ties into the rest of the Purchase Contract. Before agreeing to anything related to earnest money, be sure to discuss it first with your REALTOR® and/or real estate attorney.
The above references an opinion and is for informational purposes only. It is not intended to be legal advice. Consult an attorney for advice regarding your individual needs.