BATTLECALL GUEST EXPERT: Steve Gillman, Real Estate Investor

Earnest money is a deposit included with an offer-to-purchase, to show the seller that the buyer is serious about purchasing the house. It becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal for reasons other than those stipulated in the offer. A financing contingency is an example of the latter - if the buyer's offer was contingent on getting a loan, and he couldn't, he can cancel the contract and get his earnest money back.

How Much Earnest Money?

The amount of the earnest money deposit is ultimately up to you. Some real estate agents will outright tell you it is this or that amount, or this or that percentage of the offering price. The truth is that you can write the offer with a one dollar deposit if you wish, and agent still has to present the offer.

Of course, an offer with one dollar of earnest money may not be taken seriously, and the agent may even persuade the seller that you are not a serious buyer. The right amount then, is probably whatever the local norm is. We just bought a home in Colorado, and the agent told us that a $1,000 deposit was normal. Had he said $5,000 was normal, however, I still would have given a deposit of just $1,000. That is enough to be serious in my mind.

Another way to approach this is to do a two-part deposit. You might make an offer with just $100 in earnest money, for example, but specify in the offer that this will be increased to $2,000 once the offer is accepted, or once when an inspection, appraisal or other contingency is met. This keeps your money from being tied up until you know that the seller is serious about selling to you.

Who Holds The Earnest Money?

Don't ever give your earnest money check to the seller. If the real estate office that is handling the sale has an escrow account, it should be safe to make the check out to the broker. Otherwise, use a title company or other escrow account. The last thing you need is a seller keeping your money after you pull out of a deal because of financing problems, termite infestations or other valid contingencies in your offer. Always give your deposit to a third party to hold.

Ask how they hold it and return it too. I once had an offer rejected, and then had to wait a week to get my money back. They told me that they had to wait for my check to clear before they could issue a check back to me. I prefer it when it is handled like it was on our recent home purchase. They just hold the check until the offer is accepted, and return or destroy it if the offer is rejected.

Protect Yourself

Things happen. If you have to pull out of the deal for some unforeseen reason - one not included in the contract - you will lose your deposit. The seller could also sue you for additional damages or force you to buy the home. To avoid this, have a clause in the offer that specifies that the earnest money will be "liquidated damages" if you are in default. Ask for help with the language, but this basically means that if you need to default on the contract, the seller cannot ask for more than what you have already included as earnest money.