What’s an EMD?
Once your offer is accepted, the title company will send you a request to submit your Earnest Money Deposit or EMD. The EMD can typically be sent to the title company via wire, cashier’s check, or check, but you will coordinate with the title company directly to use your preferred method to deliver the EMD. The EMD is typically 1-5% of the purchase price and should be discussed with your agent prior to submitting your offer. The EMD is credited directly towards your out-of-pocket expenses (i.e. closing costs) to purchase the home.
So What Exactly is the EMD?
In many ways, earnest money can be considered a deposit on a home, an escrow deposit, or good faith money. An EMD is a deposit made to a seller that represents a buyer’s good faith when buying a home. The earnest money deposit gives the buyer extra time to secure financing and conduct the title search, property appraisal, and inspections before closing. The amount of the EMD is up to the buyer, with 1% or 2% on the low end and as high as 5% to 10% in a competitive market.
Why Is An EMD Important?
The earnest money deposit ensures that the buyer is serious about the purchase of a property and not “shopping around” while taking properties off the market. The EMD will be credited to the closing statements. For example, if your total closing costs are $15,000, and you provided a $5,000 EMD, you would need to bring the remaining $10,000 to the closing.
Sellers should look at the EMD as the strength indicator in the offer.
For example, if someone offers $500 EMD on a $500,000 home, the seller will feel as though the buyer is not serious. The seller may also feel it is not an amount worth taking the house off the market for.
If a small EMD is part of the purchase agreement, a Seller will likely want to investigate further with the mortgage lender. If it is a cash deal, then a Seller may ask a buyer to provide proof of funds.
When there are multiple offers, every detail is important, including the amount of EMD placed to secure the property. You want to make the listing agent and seller see your deal as the best opportunity to get to the closing table.
Who Holds The EMD?
The EMD is typically held by the title company but can be placed with a broker or a lawyer to hold, while the real estate transaction is processed.
The escrow holder will vary, depending on the instructions for sale or the negotiated place between the buyer and the seller.
EMD Loss
The buyer can be granted their EMD back if situations like the following occur, and the buyer has the contractual contingencies (i.e. ways to get out of the contract and get your EMD back) in place.
Bad Inspection (Home Inspection Contingency required)
At times, the seller will negotiate or work out the issues with the inspection, but when both sides cannot agree, the EMD can be released back to the buyer and the deal mutually released.
Property Does Not Appraise (Appraisal Contingency required)
Markets change and properties may not appraise for the agreed-upon upon price. Like the inspection, if both sides cannot come to terms, the EMD is released back to the buyer and the deal is mutually released.
Misrepresentation By The Seller
The property should have a seller disclosure, 100% completed by the seller. If there is something that is misrepresented, on purpose or by accident, the parties can find a way to fix the situation or mutually release property and EMD returned to the buyer.
Mortgage Cannot Be Approved (Financing Contingency required)
Mortgage approval letters are not guaranteeing that the deal will close. There are many other factors that come into play after the purchase agreement is signed and the deal processes. If the lender ends up stating the buyer cannot continue, the EMD is returned and the property is mutually released.
EMD Disputes
In the case where the EMD is being disputed, you will need to review the purchase agreement to decide how to proceed – some purchase agreements have built-in mediation or arbitration clauses.
You can contact the other broker, use the local real estate board, or in extreme situations, you may need to use an attorney to get the EMD released.
Both the buyer and the seller can try to claim the EMD. Therefore, having contingencies in the purchase agreement and everything in writing as the real estate deal progresses is very important. Besides everything in writing, you will want to make sure all parties sign any changes or addendums to the contract.
When does the Seller get to keep the EMD?
Buyer Gets Cold Feet And Wants Out
Just because the buyer gets cold feet or decides the home is not what they wanted; does not mean they get their EMD back. The seller has taken the home off the market and accepted the EMD in good faith that the buyer wanted the home. If the Buyer is out of contingencies in the contract, then the seller is entitled to the EMD.
Buyer Cannot Perform Or Close By A Specific Date
If the buyer cannot perform by the contract date, the seller can request the EMD be sent to them. When this happens, we typically find Sellers willing to extend the Settlement Date, often for a pro-rated amount.
Buyer Did Not Provide Accurate Information
When the buyer provides documentation to the lender, and it is later found out to be untruthful and the mortgage declined, this is not the same as being denied the loan.
These are just a handful of reasons as to why a seller may have rights to the EMD. Both the buyer's Realtor and Listing Realtor should have protections in place for their client.
Summary
Besides everything in writing, you will want to make sure all parties sign any changes or addendums.
Writing up a purchase agreement has more than a price to offer a seller. Realtors are professionals at making sure your offer is written to secure your interests and protect you.
Listen to the Realtors advice when they are working on your deal. They do this every day. Although the Realtor does work for you, and in the end will submit the offer with terms you feel comfortable with, they are the best resource for making deals happen.