What is Earnest Money?

by bryceross on December 4, 2012

Earnest Money is more often than not involved in a real
estate transaction.  It is essentially your
good faith contribution and commitment.
Generally your earnest money check is written out to your real estate
agents brokerage, the seller’s brokerage, or a dedicated title company chosen
for closing.  The money being held is
governed by your individual state laws.

When purchasing real property, earnest money indicates your
intent to follow through with the purchase.
However, a purchaser’s intent may change during the process based on the
buyers contingencies.  In Utah, the purchaser
may elect to request “Buyers Due Diligence”, “Financing and Appraisal”, and “Settlement”
as possible contingencies.

If the buyer is granted 20 days for their “due diligence”,
they can essentially cancel the contract based on several factors including but
not limited to: (within those 20 days)

Building Code/Zoning Compliance

Rental of Property

Hazardous Waste and Toxic Substances

Surveying and Staking

Home Warranty Plans

Flood Zone and Insurance

Homeowners Insurance

Title Issues/Homeowners Association

Physical Condition of the Property

Square Footage/Acreage

Utility Services


Geologic Conditions

Housing Compliance

Property Taxes

Another contingency that protects the buyer towards any
default of contract is “Financing and Appraisal Deadline”.  Essentially, this allows the buyer to verify
interest rates and verify the terms of their mortgage are suitable to their
comfort level and financial capabilities.
This contingency also entitles the buyer to an appraisal.  The subject property must appraise for the
purchase price or the buyer is allowed to withdrawal their offer and thus entitling
them to a full refund of their earnest money.

There is no standardized amount of earnest money when writing
an offer.  The more earnest money
presented in an offer generally makes it more appealing to the seller.  In many cases when building new construction
a general contractor may request a substantial amount of earnest money up
front.  This is often true in cases where
the contractor carries the construction loan until completion.  The earnest money will give them a cushion to
offload the property if necessary under conditions where the buyer fails to follow
through or is denied at the last minute for financing.

If you enjoyed this post, please consider leaving a comment or visiting my Cedar City real estate site to search homes for sale in Cedar City.

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