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What are earnest money deposits in real estate contracts?

On Behalf of | May 29, 2024 | Real Estate |

Buying real estate requires paying many different fees. One of those is an earnest money deposit. An earnest money deposit is a cash payment a buyer gives to a seller to show they are serious about buying a property. The money is held in escrow until the deal is complete. It usually goes towards the buyer’s down payment or closing costs.

If you’re buying real estate, it is important to understand how earnest money works.

Importance of earnest money in real estate transactions

The earnest money deposit is very important in real estate deals. It shows the buyer’s commitment to buying the property and is a great way to make your offer stand out. It also protects the seller. If the buyer backs out without a good reason, the seller gets to keep the deposit. This deposit helps build trust between the buyer and seller.

Typical earnest money amounts

The amount of earnest money can vary. It often depends on the property’s price and the local market. In Utah, it is usually 1% to 3% of the purchase price. The exact amount is negotiable and should be clearly stated in the contract.

Handling and refunding earnest money

A third party, such as a title company or real estate brokerage, typically maintains the earnest money in an escrow account. The contract should explicitly state the entity responsible for holding the funds and outline the stipulations for their refund or forfeiture. In the event of a valid reason for withdrawal, such as failure to secure financing, unsatisfactory inspection results, or other contractually specified issues, buyers are generally entitled to a refund of their earnest money. Conversely, sellers may retain the funds if the buyer withdraws without just cause or fails to meet the terms outlined in the contract.

Legal considerations and disputes

Disputes over earnest money can happen if one party thinks the other didn’t meet the contract terms. To avoid conflicts, make sure the contract clearly defines all terms. Keep records of all communications and agreements about the earnest money. Consult a real estate attorney to review the contract and ensure it follows Utah law.

The impact of earnest money deposits

Earnest money deposits are a key part of real estate contracts. They help ensure both buyers and sellers are committed and protected. By understanding what earnest money is, you can navigate real estate transactions more confidently and avoid disputes.