There are so many phrases, terms and abbreviations in a real estate transaction it can be confusing and many are embarrassed to ask, as if everyone should emerge from the womb knowing what “PITI” means.
If you did come to the earth with such knowledge, congratulations – I think. But if you’re like the rest of us, I’m putting together a list of real estate-specific terminology that may help. You can find the growing list, and the definition of PITI, here. Soon you’ll be able to crush a RealEstateSpeak Slam with the best of ‘em.
Today’s term: Earnest Money
This is money a buyer tenders with an “offer to purchase” for consideration. The buyer need not be truly an earnest person, though it’s nice when it happens. And some parts of the country call it a ‘binder’. It is presented with the offer to show the buyer is serious – or earnest – about the transaction.
There is no required amount. Indeed, there need be no money involved. Technically, the buyer’s good will is sufficient. So one can attempt to make an offer with zero dollars involved.
Good luck with that.
Sellers generally aren’t all that impressed with only a person’s good will. Just sayin’.
[Note: Earnest money, while paid at the start of the transaction, is not the down payment a lender will require. Earnest money is, however, credited towards that down payment. So, if your lender advises you'll need a $5000 down payment to buy in the approved price range, and you pay $2000 in earnest money, you'll need to bring $3000 to fulfill the down payment requirement on the day of closing.]
So how much earnest money should parties to a real estate sale expect to change hands? The amount is, as with virtually all terms of an offer, negotiated between the buyer and seller. A very rough but reasonable estimate is 1% of the purchase price. (example: $1500 – $2000 for a house with a sale price is $150,000) Again, negotiable between the parties.
Buyers should remember that the amount needs to be enough to prove to the seller that losing it would be painful so you’re not likely to simply bail on the transaction.
Sellers should remember that buyers need to be able to eat and pay their electric bill while waiting to close on the house. So the amount can’t be too cumbersome.
[Note 2:( I cannot stress this enough.) The check for the earnest WILL BE DEPOSITED. By NC Real Estate Commission law it must be deposited within 3 banking days of acceptance of the offer. Some have thought the check would be clipped to the file and cashed the day of closing. Having an earnest money check bounce is a less than auspicious start to a deal]
In Greensboro, the earnest money traditionally is held by the real estate company that has the seller’s house listed. (If the property is being sold by owner, I highly recommend a 3rd party hold the earnest money. An attorney is the best bet in that case.) It is held in a trust account and remains there until the closing day, when it’s released to the closing attorney and credited to the buyer’s bottom line as noted on the HUD-1 closing statement.
Hmmm. HUD-1 Closing Statement. I think I just hit on the topic for next week’s Term of the Week.
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The thoughts & opinions are mine. The quips that fall flat are someone else’s. Please feel free to shoot me an email with a question or a good joke.
And remember, real estate agents aren’t bad. We’re just drawn that way.
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