What Is An Earnest Money Deposit?

Skin In The Game

In Southern California homes are always in demand. Even if the rest of the country is in a buyer’s market, Southern California is a red hot seller’s market with more buyers than homes for sale. So how do you set yourself apart as a buyer when you’re competing with multiple offers on the home of your dreams. Cue the entrance music for the “Earnest Money Deposit” (EMD). It’s the sign to the seller that you, the best buyer in the world, is interested in their home and can prove it by throwing in some skin in the game in the form of a small portion of the down payment, paid upfront to escrow at the acceptance of the offer. This shows the seller that this isn’t some frivolous offer made at the whim of some wishy-washy buyer, but a bonafide buyer who is willing to take the steps serious and more than likely see the purchase all the way through to the end.

How Much Is The EMD?

Although there is no set minimum to be given in the State of California, there are customary amounts expected at different price points. The general rule is that the EMD should be between 1-2% of the purchase price of the home. If the home you are thinking about buying is in the $300k to $450k range, you can expect that to be between $3,000-$4,500. This amount isn’t on top of your expected down payment, it is a portion of it. For example, if you have a $10,000 down payment and your EMD is $3,000, your total down payment towards the end of the transaction is $7,000. If you ever find yourself in a scenario where the seller is asking for a bigger EMD, you have every right to say no to that. Keep in mind that if you’re facing competition for the same home and your competitor is okay with a higher EMD, you may be out of luck.

Can I Lose My EMD?

Having skin in the game is inherently risky bu there are actions that you can take to ensure the safety of your earnest money deposit. We will go over the two most important actions to take to protect your money before things go south.

Inspection Contingency

Your inspection contingency is by default 17 days. This means that from the moment the offer is accepted to the 17th day, you are to perform any and all due diligence to ensure that the home is in good condition, to ensure that the home is free of any liens or encumbrances, and it even gives you a chance to negotiate for any possible repairs that may be needed. If you happen to find a red flag big enough to cause you to want to back out of the purchase, as long as you tell your agent you’re not ready to move forward, you should be able to step away without taking any financial losses. The key here is to bail before the 17th day.

Appraisal Contingency

This step is mainly for us, American Freedom Funding. This contingency is also 17 days long and also starts from the moment the offer is accepted. We, as your lender, place the order for an appraisal inspection. As long as the home appraised for the agreed upon offer amount, everything moves forward without a hitch. If for some reason the house does not appraise at value and is actually values less than the offer price, this opens up your Plan B exit plan. You can safely back out of the deal without incurring any financial losses. In some cases the seller is willing to work with you and lower their price for the sake of the sale, so don’t use this is as an immediate bail out card. Talk to your agent or your lender to get some advice on how to move forward.

Conclusion

Every purchase is different, there are always exceptions to the rule and ways to avoid what is “customary” in the region you are buying. The one thing that you can bank on is that if you have an earnest money deposit to give when placing offers, you look like the stronger buyer. So keep that in mind, know that your agent is there to protect you and your investment, and you have the backing of American Freedom Funding to ensure that your investment is worthwhile.