I attended a seminar recently about the new changes to the sales contract published by the Tennessee Real Estate Commission. The seminar was taught by an attorney and was attended by real estate agents.
Eventually, the subject of earnest money came up. On several occasions, the attorney teaching the seminar made comments about what he deemed insufficient earnest money on real estate contracts. I’m paraphrasing of course, but he made comments like, “If you’re only getting $500 or $1,000 I wouldn’t even bother with getting any earnest money at all”.
I disagree 100%.
$1,000 or even $500 is much better than $0.
Like most everything in a real estate contract, earnest money is negotiated. And the terms of the rest of the contract will have some bearing on the amount of earnest money that is suitable. From the deals I see in Shelby, Tipton & Fayette Counties (this is off the top of my head – I didn’t compile any stats from files), this tends to be a fair representation of earnest money that I see in contracts:
Sales Price Earnest Money
I could continue but as I typed this I noticed 1% seems to be the norm.
On a typical offer, if agents offer earnest money in the ranges above, then I think most sellers would accept that term of the contract.
Here is how I look at earnest money – what amount will compensate the seller for the inconvenience if the buyer defaults on the contract. That depends on a lot of factors – time to close, repairs being done, whether other offers were rejected, lost marketing time, etc. On the other hand, what amount would the buyer not want to forfeit if they decide to back out of the contract.
Under certain circumstances, if you are representing a seller, you may want more earnest money. For example, if the buyer is asking for an extended closing date, or if the seller agrees to a lot of repairs to be completed prior to closing.
Whatever amount of earnest money you end up with – anything is better than zero.