Attention San Diego Home Buyers: Learn How to Handle Earnest Money

Something that takes some San Diego home buyers by surprise is how much money must be put down for earnest money along with the fact that they could lose it if they back out of a real estate deal.  Earnest money is provided to a seller to ensure the home buyers are serious with their offer. Some reasons allow a buyer to leave a deal with their earnest money, but few buyers know when these cases can occur.  

With this in mind, San Diego home buyers should learn a little about the rules with earnest money before putting down more than necessary.  

What to Offer

There is no set amount to offer when referring to earnest money.  Some homeowners are fine with a small offer of a couple of hundred dollars while others expect thousands of dollars to be put forth.  It depends on the San Diego market and how much the home buyer is able to part with.

This payment shows the sellers that the home buyers are going to stick with the deal until the end.  Putting down one hundred dollars does not instill much faith in a home buyer. However, someone who throws down five thousand dollars is not likely to walk away on something silly.

To put a number to earnest money deposits on average home buyers will put one to two percent of the purchase price of the home into the escrow account.  Some may want to sweeten the deal by putting in more, going up to five or ten percent. In the event the buyer breaks contract, the money then goes to the seller to compensate them for their lost time on the market.

Who Has the Money?

Earnest money does not typically go from the San Diego home buyer to the seller.  The home buyers will make a deposit, usually a check, to a third party. This third party will hold the check and not cash it until the sale has been completed or the contract is broken.

The money stays in an escrow account held by a third party if the check is cashed right away.  Until the sale is completed or the buyer backs out, this third party must keep the money from either party.  If the buyer gets cold feet the money will go to the homeowner without the worry that the buyer will not pay since the third party is involved.  

Third Parties

There are a few options for the third party that can hold the earnest money deposit.  The real estate broker may be the go-between. Or they may hire a title company that specializes in holding escrow accounts.  Even lawyers or banks can handle this process.  

To determine who holds the deposit, the purchase and sale contract must outline this third party.

When to Walk Away with the Money

San Diego home buyers do have some options to end a deal without losing their earnest money.  Contingencies on the offer save them from losing out on this cash. The first is through financing.  This stands in case the home buyers cannot secure financing for the home they are able to walk away with no strings attached.  

Popular contingencies include the condition of the San Diego home.  Major problems found in the home during an inspection or appraisal can make a buyer think twice about the purchase.  By having this contingency they are able to move on to the next property.

Pay attention to the title, as well.  Adding in a contingency that protects the buyer from a home with a title that has liens is necessary. Buyers are often blindsided by liens on the title and either foot the bill or have to break the contract to avoid the debt.  

Finally, the appraisal is important because it allows the mortgage company to know if the San Diego property is worth the offered amount.  A house that appraises for less than an offer puts a buyer in a tough spot. They must either pay the difference out of pocket or risk breaking contract if they do not have a contingency in place.  

Earnest money helps to protect San Diego sellers from getting bogus offers.  Serious San Diego home buyers will make a solid offer, provide an ample deposit towards earnest money, and follow through on the deal.  Otherwise, the seller is owed the earnest money unless the offer contains contingencies that allow the buyer to walk away.