Understanding the Contract: Earnest Money
Earnest money is the buyers’ good faith deposit when purchasing a home and there are specific terms that relate to it.
Important Dates and Terms
Section 5 of the South Carolina Agreement to Buy and Sell outlines the earnest money for the transaction. When you write an offer, you will indicate to the Seller how much money you would like to offer, when that money is due, who will hold the money (the escrow agent) and what form it will be given (cash, check or another form). The amount of money, due date, who holds the money and form are negotiable.
This section also states that Brokers do not guarantee the payment of a check and that the escrow agent must provide communication regarding the status and confirmation of the earnest money to the Broker when asked. In our area, this is typically done by sending a receipt when it is received.
The last sentence in the first paragraph of the earnest money section is very important. That sentence states that the Seller may terminate the contract if the earnest money is not received by the agreed upon date.
What Happens if the Contract is Terminated?
The second paragraph of the earnest money section outlines what happens if the contract is terminated for any reason. The escrow agent (the person holding the money) cannot disperse it unless both parties agree or a court has ordered the it to be dispersed. If the dispute of earnest money goes to a court, the party receiving the least amount of earnest money would be responsible for escrow agent fees, court costs and attorney fees. Most often, the dispute of earnest money would be handled by a Magistrate’s Court and the parties would be responsible for paying a fee to the escrow agent before any action will be started.
Earnest Money Best Practices
What are the best practices?
Amount to Offer:
- For purchases under $200,000, I recommend an earnest money deposit of $1,000.
- For purchases over $200,000, I recommend an earnest money deposit of 1% of the purchase price (so a $400,000 purchase price would mean a $4,000 deposit).
- The one caveat to those suggestions is to keep it under $7,500. The limit to Magistrate’s Court is $7,500. If the deposit is more than $7,500, the dispute would have to go to civil court and could take longer and cost more should there be a dispute.
Who Holds the Money?:
As a Buyers’ Agent, I prefer my office or your closing attorney to hold the earnest money. As a Sellers’ Agent, I prefer the buyers’ agent’s office or the buyers’ closing attorney to hold it.
In either case, I prefer it to be in the form of a check or wire. Be aware though that some offices do not accept wire transfers for earnest money.
When is it Deposited?:
The earnest money needs to be deposited as soon as possible. If you live locally, you can easily drop off the deposit in a few days. Most of my clients live out of state though so I suggest having it due a week after you write the offer. This date may need to be changed if negotiations take a few days. A week gives you time to mail the check or wire funds. When mailing a check, I recommend sending the check by USPS Priority Mail, UPS or FedEx with a tracking number.
Meeting the Due Date:
I cannot stress enough the importance of getting the earnest money to the escrow agent by the due date. Sellers can terminate the contract if it is not received by that due date.
If you find that you will have a hard time getting the earnest money to the escrow agent on time, let me know. I can talk to the Sellers’ Agent to let them know your situation and see if we can extend the date by a few days.
I can think of two clients that were not able to get their earnest money to the escrow agent by the due date in the contract. In one case, we pushed back the due date by a few days. In the other case, we switched the form from a check to wire and changed the escrow agent from my office to the attorney’s office. My clients were able to wire the funds to their attorney’s office to meet the deadline. In both cases, the sellers were agreeable to the changes. While this is not a guarantee, communicating with the sellers and keeping them informed goes a long way.
As a Buyers’ Agent either I or my Broker will complete an earnest money receipt once we receive it or we could get one from the attorney’s office if they are holding it. I would send that to the listing agent and you so everyone knows the it has been received.
As a Seller’s Agent, I would ask for that receipt to be sent to me by the due date so I know the it has been received and I would send you a copy.
Earnest money is a very important part of the contract and I believe sometimes people overlook its importance. When entering into a contract, be aware of the dates, amount due and who will hold the earnest money.
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