Hello LasVegasRealEstate.com readers and welcome to our blog. What is an earnest money deposit? – Here is a simple explanation, if you are a first-time homebuyer you probably already know that you will need a down payment if you hope to get a mortgage loan on that home you’ve been eyeing.
What you may not know is that you will also need cash for your “earnest money deposit” and it has to be ready and available to deposit at the escrow/title company when your offer on a home is accepted. Most contracts to purchase Las Vegas real estate require the buyer to make the earnest money deposit within 48 hours of an accepted offer.
This deposit takes its name from its purpose: It shows the sellers that you are earnest about following through with the transaction to purchase the home – you are, in essence, “putting some skin in the game.”
Although the amount of the deposit isn’t set by law, it varies according to the listing price and how aggressive the Seller or his/her listing agent choose to be with potential buyers.
Something called “liquidated damages” typically determines how much a savvy listing agent will counsel his/her clients to demand.
Liquidated Damages
Buried within most pre-printed real estate purchase agreements is a clause known as “Liquidated Damages.” This concept is explained by Jack Woodcock at Berkshire Hathaway HomeServices – Nevada Properties in Las Vegas:
“A liquidated damages clause establishes – at the time of contract formation – what the monetary value of damages shall be in the event of a contract breach by one of the parties.”
In other words, should the buyer fail to hold up his/her end of the bargain, the seller agrees not to sue but to keep whatever amount of money the parties have determined will cover damages.
The liquidated damages amount may be stated as a percentage or specific dollar amount. In Nevada for instance, that amount in most cases is 3 percent of the sales price of the home.
So, what do liquidated damages have to do with your earnest money deposit? If you default on the purchase of the home, this deposit may be forfeited as liquidated damages.
The liquidated damages clause must be initialed by both parties to be valid and the release of the money must be agreed to as well. Then, there is the issue of trying to prove that you suffered damages.
How Much?
The amount of earnest money you’ll need to deposit varies and the homeowner can dictate to their listing agent an amount they feel is appropriate. One to two percent of the purchase price is standard in the Las Vegas area on homes priced up to $500,000 but the percent can increase for pricier homes. One additional note, in some cases the buyer may be asked to increase the deposit after the removal of contract contingencies.
As mentioned earlier, some listing agents will counsel their clients to ask for an increase that will make the deposit equal to the maximum amount of liquidated damages.
Like many aspects of the residential purchase agreement, the amount of earnest money to deposit is negotiable so – whether you are the buyer or the seller — ensure that you’ve hired a knowledgeable real estate agent that can counsel you wisely.
Serious Buyers Only, Please!
Buyers don’t make frivolous offers when they have to present earnest money to validate their offer. Sellers take comfort in knowing they’ve taken their home off the market for someone who truly wants to buy it. When multiple offers come in, sellers may use the size of the earnest money deposit as a yardstick to measure buyer seriousness. A seller in this position doesn’t benefit from a larger deposit; the money goes to an escrow account held by an escrow/title company who holds it until the closing takes place.
Is my Earnest Money Deposit a part of my down payment?
Technically no, but in reality, the answer is yes. The earnest money deposit will be shown as a credit to the buyer at closing and will offset part of the down payment or closing costs. There are some rare instances when the buyer will receive some or all of the earnest money deposit back and it will not be applied to a down payment – a VA loan comes to mind as an occasional exception where the required earnest money deposit (remember: set by homeowner and listing agent) is greater than the lender required down payment to complete the loan.
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