If you are the buyer of the property, the earnest money should be as little as possible. The higher the price of the property, the higher the earnest money. As a higher end buyer, you are expected to have more assets. The earnest money is usually a relatively small amount. Because the buyer's earnest money is at risk if the transaction fails, but only after all the contingencies have passed, the second tip is to tender the earnest money after the inspection deadline has passed.
There are numerous contingencies in the standard Colorado Real Estate Purchase contract, including contingencies for satisfactory title, inspection, appraisal, HOA covenants, insurance, survey, as well as the ability to secure satisfactory financing.
But the inspection is usually where a deal dies. The third tip is to make sure the contingencies are extended to protect the earnest money. If the appraisal is delayed, or the loan conditions deadline is not met, make sure these terms are extended through an amendment to the contract to protect the earnest money. After the deadlines for these contingencies passes, or if the notice requirements attributed to each is not followed, the earnest money becomes non-refundable and is forfeited by the buyer.
If the transaction fails because of one of the contingencies, say, for example, the home fails inspection, or the appraisal comes in low, and the proper timely written notice is given to the Seller as per the contract, the earnest money is refunded to the buyer.
Practically speaking, earnest money is rarely forfeited. Different trust accounts exist for different classes of beneficiaries. The following list demonstrates the types of trust or escrow accounts based on different possible classes of beneficiaries. There are varying rules for brokerages that handle mostly sales, but have some property management.
In some cases, they can use the same trust account for both real estate sales and property management. This part of the transaction deals with liquid money before closing, so a lot of different people have vested interests in keeping things above board.
Legal processes and issues aside, earnest money is given to show that the buyer is serious, that the offer is genuine, and that everyone wants to move forward with the sale of the property in question. Earnest money deposits must be transparent and trackable. Either the buyer gets it back, if, for example, a seller decides they no longer want to sell and terminate the contract. Or, the seller gets to keep the earnest money, if, for example, the buyer decides they no longer want to buy, and pull out of the deal in a way that breaches the Contract to Buy and Sell Real Estate see copy of Contract here.
It is my opinion that Colorado state contracts favor the buyer. The amount of money that buyers need in the earnest money deposit depends on the list price of the home and the general movement of the local real estate market. Regions with a high cost of living or a tight market may use the deposit as a way to ensure that the buyer is really ready to proceed with the transaction.
In this case, buyers can expect to pay as much as percent of the list price. The point of the earnest money deposit is to show the seller that the buyer is willing to invest their own money into the transaction. This means that the deposit must come very early in negotiations. A real estate agent can help buyers determine which amount is best, and many buyers will have that amount ready.
Buyers often provide the deposit in the form of a cashier's check once the seller accepts the purchase offer. The contract usually specifies an amount of time for receipt of the deposit, typically a day or two.
During the sale process, the earnest money is not held by the seller or the buyer. Be sure to ask your Realtor what the seller wants. Many times the earnest money requirement is based on a percentage of the purchase price. What is earnest money? Earnest money comes back into the picture in a real estate transaction at closing.
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