Monday, March 20, 2006

Earnest money

Saw a piece in The Washington Post recently that was supposedly about young home buyers, but actually the article was more about earnest money. What is the correct amount or percentage of earnest money to put down on a potential real estate purchase?

There are obviously many different angles to view this from. However, as a frequent Seller's attorney I'm amazed at the tiny amounts of earnest money that I see being allowed on signed contracts. If I'm Seller/Seller's counsel I think issue one when I see an offer is, I'm assuming this deal will not close and what's Seller's remedy? There's not going to be protracted litigation with a residential real estate closing in all but 1 out of 100 deals. But if that Buyer screws up I want a pot of money sitting there to pay me for my 1-2 months off the market.

The above piece talked about 5% to 10% as a good guideline for earnest money. I think that sounds high, desirable but perhaps not realistic. I always think a minimum of $1,000 per $50,000 of purchase price. I think in Chicago proper the form contract is typically using 5%.

I'm just amazed at how often I see $1,000.00 earnest money down on a $300k to $400k type properties. Also, even worse, when the real estate agents aren't collecting earnest money often times after the earnest money increases after the attorney approval period.

What's the correct earnest money guideline?

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