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What is EM | Why do you need Earnest Money | And What is Earnest Money For?

Good morning.

I’m Alxander and welcome to another edition of the SLC Real Estate Agency’s Morning Edition.

We’re pleased to bring you this lovely content by podcast, by video, by our blog, we were so proud of it we put it on Facebook, LinkedIn, Twitter. Hopefully you can share it with others.

This morning we’re going to earnestly talk about earnest money. And so let’s jump right into it.

What is Earnest Money? What is EM?

Earnest Money is due consideration that the buyer presents to the seller for accepting their offer and proceeding with them as the buyer.

This due consideration, which is usually in the form of a check, is, generally speaking, held at the buyers brokerage.

It would be held here at KW Salt Lake City Keller Williams. It would be held in a manila folder over there in the Market Center.

So it doesn’t go into a bank account. Doesn’t go to my bank account, doesn’t go into the sellers bank account. It’s just held in a folder as due consideration.

What’s Earnest Money For? What is EM for?

For what?

Well, let’s get into that.

The seller is taking a risk by going with this buyer who’s saying that they’re able to fulfill their agreement. If they’re not able to fulfill their agreement, what does the seller get?

Well, as liquidated damages that’s what the earnest money is for.

The buyer must be okay with letting go of some money in the event that they’re unable to fulfill their agreement. And the seller must be okay with the amount that the buyer has presented as due consideration.

See how that balances. It must be okay with the money that will be let go, and the money that they will receive.

How much Earnest Money? How much EM?

So keeping that in mind, how much is a fair amount of money?

Well, that’s an agreement between the buyer and the seller.

The buyer, in terms of industry standards, generally puts forward about a thousand dollars The sellar, generally speaking, wants to see more, but we’ll be okay with that… generally.

Why Earnest Money? Why EM?

But let’s look at the psychology just for a moment.

You, the buyer, you’re going to be purchasing this home. The earnest money that you put forward goes towards the price of the home. How earnestly do you want to purchase the home? That’s what we’re saying to the sellar.

“Am I $1,000 serious, am I $5,000 serious, am I hundred thousand dollars serious?”

That’s entirely dependent upon you.

And if the seller, on the other side, needs a buyer that’s $1,000 serious, $5,000 serious, and so on and so on… well, that’s an agreement between the buyer and the seller.

When do the seller get the Earnest Money? When do I lose my EM?

So when can the seller accept the money?

Well, to be fair, the money is going towards the purchase price of the property. So it is, in some ways, the seller’s already. But because we haven’t consummated the agreement, as they sometimes say, that the due consideration isn’t ultimately the sellers yet.

There are instances which might create what’s called default, when the buyer does not cancel the agreement on time, based on the deadlines that we’ve discussed in some of our earlier podcasts:

Well, those can constitute default. And the seller may require the earnest money as due consideration for liquidated damages. For their time basically being wasted.

Honestly from, you know… like… a risk standpoint, it’s a lot easier to let go of a couple thousand bucks than to be held on the hook from the seller for a couple hundred thousand.

So you kind of have to weigh it.

How do we prevent losing EM? How do we protect our Earnest Money?

So when can we cancel and not be in default?

Well in the agreement that we produce, and is agreed upon by buyer and seller, we have what are called contingencies.

Buyer’s Due Diligence Contingency

The first of which is the buyers due diligence contingency:

  • If you take a look at the house…
  • (Or) You don’t like the house…
  • (Or) You do the inspection and the inspection doesn’t come back great…

You can cancel and receive your earnest money back with no problems. No strings attached, and be on your way.

Appraisal Contingency

The next contingency is what’s called the appraisal contingency:

If the home when is appraised is not worth what we say it’s worth. Well, you can cancel and have your earnest money back. No problems.

Finance Contingency

The last of those contingencies is what’s known as the finance contingency.

If you in the end cannot qualify for the money or cannot obtain the funds to close the deal

  • Should you be on the hook for hundreds of thousands of dollars?
  • Or would you rather just let go of a couple thousand bucks and call it a day?

That’s what you’re left with, right?

How does an real estate agent protect the buyer’s Earnest Money?

Now ultimately, my job, as your agent, is to ensure that you don’t lose money, okay. That that doesn’t happen.

My job as your agent is to make sure that that money goes where it belongs, either in that house or back in your pocket.

Hey, I thought you said the Earnest Money was the seller’s?

And on the flip side of that when I’m representing you as a seller. I want to help you understand what it means to accept that money when the buyer is in default: it’s a serious time when that has to happen, and no one wants to have that happen.

They would rather that the home sold, or that we go with a new buyer.

Yeah… it’s not a it’s not fun… That’s not fun.

I mean, sure, getting some money is great…

But closing a deal is way better for everyone, and is in fact ideal and what we’re striving for.

Wrapping up the Earnest Money conversation

So I hope you understand that when we’re striving to close your transaction:

  • We need to protect your earnest money,
  • And also we need to protect the property.
  • We need to protect the integrity of both the buyer and the seller.

And yeah, that’s what we do around here.

Please Share Us With Others

So…

Thank you very much.

Thank you so so much for joining me for another Morning Edition of the SLC Real Estate Agency, here at Keller Williams, Salt Lake City in Sugarhouse.

It’s been a pleasure to make these videos, to make this podcast happen, and to get the transcripts on the website so that people can read them later. We are so grateful to be able to deliver this content nearly every day. Yeah… nearly every day.

We’re doing pretty good.

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That’s awesome. We really do appreciate that.

And if you would please let other people know about the SLC Real Estate Agency.

It’d mean a lot, probably to them.

So thank you very much, and I hope you have a wonderful day.

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