First time buyers most likely have never seen a real estate purchase contract (called a ‘REPC’, pronounced ‘Rep-C’) but have probably heard of down payments, earnest money and closing costs. Nowadays lenders can grant you a zero-down mortgage but a seller is still going to want to see you put some skin in the game up front. That skin is called ‘earnest money’ and is really often misunderstood by both buyers and sellers. Here’s some clarification that should help:

Earnest money is considered good faith funds, money that is put down before closing escrow on a property to show the seller(s) that you’re serious about purchasing. In some states it is common to put 1% of the asking price as earnest money, whereas in Utah there is no common amount. Technically a contract doesn’t need a bunch of earnest money because a contract becomes a contract when the parties agree on terms. I certainly have written many contracts in my day that had no earnest money up front because it wasn’t required by the parties, but in reality a seller would FREAK if a buyer didn’t wiggle some funds in front of the seller up front in the negotiations.

Let’s say the purchase price is $500,000. I would suggest to a buyer to offer $10,000 earnest money. If there are multiple offers I might suggest putting the buyers cajones on the table and write in $50,000 earnest money to really show the seller how serious they are!  BUT WAIT! What if the home inspection turns out horrific and you want out of the deal. Will you lose your earnest money? Simple-if you abide by the terms of the contract you won’t lose your money.

There are four dates in a REPC that we pay attention to: 1) the seller’s disclosure to the buyer (wherein the seller gives the buyer a title report showing liens on the property, a plat map of the lot and a ‘seller’s property disclosure’ form-a 16 page ‘what do I know about my property’ form, any leases and if a condo, the budget, rules and minutes of the homeowners association), 2) the buyer’s due diligence deadline (the time the buyer has to inspect the property and go over any information the seller has provided), 3) the appraisal and loan deadline for the buyer and 4) the closing date of the sale. Home inspections can take a minute, and a normal time to complete them is about 10 -14 days. IF the buyer backs out of the contract before the 14 days, the buyer gets all their earnest money returned.  IF the property doesn’t appraise for the sales price or the buyer doesn’t get final loan approval, the buyer gets their money back.

Once the earnest money check is deposited, the money belongs to no one! It sits in escrow until the buyer fails the deal or it’s credited to the buyer at closing as part of a down payment, or returned if it’s a zero-down loan.