Time to Ride the Silver Tsunami Part 3 – Earnest Money Deposit

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As you move through the selling process, securing a strong Earnest Money Deposit (EMD) becomes a crucial step.  An EMD is a deposit from the buyer that demonstrates their seriousness about purchasing your property at the agreed purchase price.  In this part of our guide, we’ll explore four key considerations when dealing with Earnest Money Deposits.   

1. Amount

In Colorado, the typical Earnest Money Deposit falls between 1% and 5% of the purchase price. Determining the exact amount you request depends on several factors, such as the market conditions, property value, and local customs. In a seller’s market with high demand, you might consider requesting a higher EMD to deter less serious buyers and strengthen your negotiating position. Conversely, a buyer’s market with lower demand might warrant a lower EMD to attract more potential buyers.

Generally, higher-priced properties tend to have a larger Earnest Money Deposit compared to lower-priced ones. This reflects the greater financial commitment involved in purchasing a more expensive property. And as for local customs, every market has its own norms. Consult with your real estate agent to understand what’s customary in your area regarding Earnest Money Deposits.

2. Proof of Funds

While a serious buyer is essential, ensuring they have the financial means to close the deal is equally important. Here’s where Proof of Funds comes in. Discuss with your agent how to obtain this from the buyer. This could be:

  • Pre-approval Letter: A pre-approval letter from a reputable lender verifies that the buyer has been pre-qualified for a mortgage up to a certain amount.
  • Verification of Cash Reserves: If the buyer plans to pay in cash, they might provide documentation demonstrating they have sufficient funds readily available.

3. Escrow Holder

The Purchase Agreement typically specifies who holds the Earnest Money Deposit during the escrow period, which is the timeframe between signing the contract and closing the sale. A common and secure choice is a reputable title company. They act as a neutral third party, safeguarding the funds until the sale is finalized.

4. Form of Earnest Money

For maximum security, it’s highly recommended to request “good funds” for the Earnest Money Deposit. This could be a wire transfer directly deposited into the title company’s account. While some sellers might accept cash or a Letter of Credit, these methods carry a higher risk of complications. Cash can be easily lost or stolen, and Letters of Credit can be subject to challenges or delays depending on the issuing bank’s terms.

What Happens If the Deal Falls Through?

The Earnest Money Deposit acts like a down payment on your property. Upon successful closing, it’s applied towards the buyer’s closing costs. However, if a deal falls through, the fate of the Earnest Money Deposit hinges on the terms outlined in the Purchase Agreement and the reason for the failed sale:

  • Buyer Defaults: If the buyer breaches the contract without a legitimate reason (as stipulated in the agreement), you, the seller, may be entitled to keep the Earnest Money Deposit as compensation for the inconvenience and lost time.
  • Seller Defaults: Conversely, if you, as the seller, back out of the sale without a valid reason stipulated in the contract, you might be obligated to return the Earnest Money Deposit to the buyer, potentially even pay additional damages.

The Earnest Money Deposit plays an important role in securing a smooth and successful sale. By carefully considering the amount, proof of funds, escrow holder, and form of payment, you can ensure your interests are protected throughout the transaction.  

Have More Questions?  

If you have any questions about selling your property or the EMD or simply need help with selling your property, call Cynthia Daughtrey of 3D Real Estate at 303-548-9659.

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