4 Q & A about Earnest Money Deposits
Here are 4 commonly asked questions and answers about Earnest Money Deposits from The North Carolina Real Estate Commission’s pamphlet Questions and Answers on Earnest Money Deposits.
Q: What is “earnest money?”
A: It is money you give to the seller (or the seller’s agent) to show your good faith when making an offer to purchase the seller’s property.
Q: Do I have to pay an earnest money deposit to have a valid contract?
A: Although no law requires it, sellers typically do require it. If you agree to pay earnest money but do not make the required payment or your earnest money check “bounces,” you will probably be considered in breach of the contract.
Q: How much earnest money should I pay?
A: The amount is negotiated between you and the seller. It is typically a small percentage of the purchase price and can vary depending upon local market conditions, the price of the property, the type of property (e.g. vacant land, existing housing, or new construction), whether cash advances to a builder or seller are involved, and other factors.
Q: Who can hold earnest money?
A: Any person (or entity) agreeable to you and the seller, but usually a licensed real estate broker. As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close (due to the seller’s death, divorce, bankruptcy, judgment liens, receivership, fraud, tax liens, title problems, etc.). Consequently, most buyers prefer to have real estate agents or attorneys hold the earnest money deposit. Since they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used.
