Earnest Money Contract

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Earnest Money Contract

A Brief Introduction About the Earnest Money Contract

Earnest money is the term that is used for an amount of money that is given by a buyer to the seller. This amount indicates that the buyer has good faith in a particular transaction, for instance, a property (Ellis & Abramowitz, 1984). This term and earnest money agreement are mostly used by the people involved in the real estate wherein the seller has to allow the buyer some extra time to arrange for finances for the property (Walker, 2009).

Earnest Money Contract is like a simple deposit that is held only by the buyer. The parties involved in such transactions have to sign the earnest money agreement, which is a standardized contract, and it may differ as per the state laws. The form of the contract can be attained from the real estate agents and is also available online on the website. The earnest money agreement form contains stipulations made between both the parties.

Who Takes the Earnest Money Contract?– People Involved

There are two parties involved in an earnest money agreement. One is the seller of the property, and another party is the potential buyer of that property (Smith, 1959). Before signing the agreement, all the terms, conditions, and other information must be thoroughly read.

Purpose of the Earnest Money Contract– Why Do You Need It?

The purpose of the earnest money agreement is to attain acceptance on offer made on real property from the buyer. This agreement helps the seller to know that the buyer is seriously interested in the property (Allen & Swisher, 2000). The agreement memorializes the total amount that helps the two involved parties, to be honest until the actual selling of the property is done.

Earnest money contract is mostly used for real estate business. The contract is usually filled by both parties when the buyer is interested in buying the property that the seller wishes to sell. Also, it makes a kind of reservation for that particular property so that no other potential buyer acquires it before they do the aim of this agreement to initiate a safe transaction between two parties.

Earnest money agreement is different from down payment agreement as the amount, in this case, is lesser and is more like a good-faith gesture. Once the buyer and the seller have agreed to the terms of the agreement and the price, then the final signatures are done along with the inspection of the property. Every agreement should mention the payment token, which is decided by both the parties mutually.

Contents of the Earnest Money Contract– Inclusions

  • Contact date – Firstly, the agreement includes the date of the agreement, which is usually two to five years. The starting of the agreement date and the end should both be mentioned.
  • Parties – The names of the parties involved in this agreement, along with their contact details and address, should be mentioned.
  • The amount payable – The amount which will be paid by the buyer of the property to the seller of the property will be present along with the sum of all debt assumptions (Litvinoff, 1973).
  • Earnest money clause – This clause states that the amount should be deposited as per the earnest money agreement
  • Assets included and excluded – The next point states the assets that are included or excluded on the sale of business like the name of the business, Domain Name, furniture, lease, trademark, contact number, cash, deposit, lease deposit, etc.
  • Assignment rights – This clause states that the buyer has the right to assign the rights as well as responsibilities under the earnest money contract. In such cases, the buyer agrees to provide a guarantee to the payments of property lease.
  •  Inventory – This point clarifies that the property sale price may increase or decrease according to the difference in the stock held for resale (Shilling et al., 1985).
  • Lease – Under this clause, it mentioned that the seller is ready to sell the property and transfer the lease to the potential buyer. Then the seller agrees to attain written consent from the buyer.
  • Inspection – The buyer will personally examine the assets and will not rely on any of the real estate agents

How to Draft the Earnest Money Contract?

While drafting the earnest money agreement, it’s important to keep something in mind like: –

  • The information of both the buyer and the seller should be identified based on the national ID card number.
  • The information about the house and the property, which is for sale along with a subject to any charges (if any), should be mentioned.
  • Then the price of the property along with the details of the amount of both buyer and seller that they are liable for will also be mentioned.
  • The fourth step will disclose the deposit amount, which is the nonrefundable amount that the buyer pays the sellers to sign the earnest money agreement. This amount is later deducted from the actual sale price of the property.
  • The term period in which the purchase and sale agreement should be signed (Litvinoff, 1973).
  • The broker’s fee for negotiating the sale and if the seller agrees to the amount the closing date of the sale and the commission as agreed will be listed in the contract between the broker and seller.
  • The signature of both parties should be present on the agreement once they accept the terms and conditions of the earnest money agreement.

Negotiation Strategy

The amount of earnest money is negotiated between the seller and the buyer of the property, which is around 1% to 2% of the total purchase amount. (Litvinoff, 1973).This good faith amount is held by the real estate agent or the seller’s broker and is used as a credit towards the down payment.

Benefits & Drawbacks Of The Earnest Money Contract

Benefit – Earnest money deposit is an important part of a real estate company as it tells the seller that the buyer is interested in buying the property that he wishes to sell. Earnest Money contract leads to trust between the buyer and the seller (Leegard et al., 2016). Without the earnest money agreement, there are chances that one party may cheat another party for their self-interest. With the help of this agreement, the real estate owners can provide offers on various properties and enhance their revenue. This agreement leads to mutual understanding between two parties leading to benefit for both buyer and seller.

Drawback – Earnest money agreement is an additional cost that the buyer has to bear. The buyers consider the earnest deposit amount as a good faith deposit, which is like an advance payment, and the sellers are not ready to accept offers without good faith (Leegard et al., 2016). If there was no good-faith amount, then the buyers could have made many offers on different properties. The state regulation can be a problem as the earnest money agreement amount depends on the state laws and regulations and not as per the seller’s preference.

What Happens In Case Of Violation?

When a buyer signs the earnest money contract, then it means that the buyer is ready to buy the property. Similarly, when the seller signs this agreement, that means that the seller is ready to sell the property as per the mutually decided price (Hebert, 1930). Paying the earnest money deposit indicates that the buyer has a serious interest. But when due to some reason the deal gets off, then there are chances that the buyer may not get his money back. In this case, due to the breach of contract(1), the seller can be taken to court. But the deposit cannot be claimed to buy the buyer until the judge rules on it.

When two parties get into the contract of buying and selling of property, then earnest money agreement is used. Along with the signed agreement, a deposit amount is also accepted, which can range from $500 to $5000 depending upon the price of the property sold. If the deal doesn’t work, then the amount should be given back to the buyer (Leegard et al., 2016). It’s recommended that once the contract is signed and the deposit amount is given, then it’s necessary to inspect and survey as soon as possible to save the earnest money, just in case if there is some problem with the property or the deal.