What Is Earnest Money?

Real Estate
December 8, 2020by Sarah Day
Montana law does not require buyers to put down earnest money with a buy-sell agreement. However, in our current market environment I highly recommend to all my buyers that they put down a reasonable amount of earnest money...
Earnest money are funds that a buyer presents to a seller in conjunction with a buy-sell agreement (contract for purchase). This is often done to provide assurance to the seller that the buyer is serious about purchasing the property. These funds are usually held by a third party, such as the title company, until the transaction is complete.

Montana law does not require buyers to put down earnest money with a buy-sell agreement. However, in our current market environment I highly recommend to all my buyers that they put down a reasonable amount of earnest money to show the seller your good faith intention of purchasing.

How much I recommend putting down depends mostly on the purchase price of the property. As you might imagine, the higher the purchase price, the more I recommend putting down as earnest money. The earnest money goes towards your down payment at closing and will show as a credit on your closing statement. It may or may not be returned to you if you need to terminate the contract.

If you terminate based on a contingency, it should be returned back to you so long as you terminate before the contingency expires.  Examples of this might be inspection or financing. If you terminate for other reasons or after all contingencies have expired, the earnest money will go to the seller. When you are putting in an offer on a property, you should always be conscious that there is a chance that you will lose your earnest money. A buy-sell agreement is a contract and should be entered into only if you are serious about moving forward.

There are instances where some or all of the earnest money becomes non-refundable at different points throughout the transaction. For instance, the buyer may request an extension of time on the inspection contingency due to unforeseen circumstances. The seller might agree, but only on the condition that afterwards the earnest money becomes non-refundable. These situations are always on a case by case basis, but often provide a compromise between both parties involved.

If you do include earnest money in a buy-sell agreement, you MUST have those funds to the appropriate party (typically the title company) by the stated timeframe or you will be in breach of contract and could lose the property. Unless otherwise stated, the timeframe is three business days. Earnest money can be brought in cash or check to the title company. The title company will take down the property address for the transaction and provide you a copy of the check before you leave. A formal receipt will be sent out in the following days for your records.

Wire transfers are also an option and the title companies can provide their wire transfer instructions. However, please be aware of WIRE FRAUD! Unfortunately, wire fraud is a real concern and the real estate industry is too often a target. When wire transfer instructions are received, always call the title company to confirm that the instructions are correct and were sent from them.  I personally recommend using a check if possible.

Lastly, earnest money, though not legally required in Montana, can be a tool used in multiple offer situations. In our current market conditions, you often see multiple offers on properties. If you are financially able and have the cash on hand, a larger amount of earnest money can help your offer stand out.

If you have any questions regarding earnest money or real estate in general, don’t hesitate to reach out!
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