True or false? The earnest money and escrow process is easy to understand and makes total sense.
False! If this topic always given you a case of the yawns or left you scratching your head in bewilderment, you’re not alone. Even real estate experts at the Massachusetts Association of Realtors admit that the concept of offering up money as a guarantee of a home purchase contract is not the most logical practice. However, it is deeply ingrained in both real estate law across the U.S. and in standard real estate practices.
The basic principal is twofold: 1. Earnest money shows the seller that the Boston condo for sale buyer is serious about the contract (nothing makes things serious like laying a few thousand bucks on the table). 2. Earnest money gives the seller some kind of compensation should things go terribly wrong and the contract falls through. As a Boston real estate agent, it’s my job to help you understand the process and highlight the facts you need to know. So let’s get started!
True or false? Earnest money is yet another fee I need to be able to cover for my Portland home purchase.
False. In real estate transactions, earnest money the deposit placed by the buyer to back up a purchase agreement. It’s actually part of your down payment (dollar for dollar). In the end, assuming the home closes without buyer or seller pulling out of the agreement, all of these funds go toward the total cost of the home.
True or false? Earnest money is due at the same time that a purchase agreement is signed.
False. Once the Boston condo buyer and seller have an agreement about the terms of sale of the home, the buyer has some time, usually three business days, to deposit the earnest money (typically with a local Title company).
True or false? The buyer can get all of their earnest money back if the home sale doesn’t go through.
Partly true. It depends on whose fault it is. If the seller changes their mind or can’t meet all of the terms of the purchase agreement (for example, the seller doesn’t move out by the closing date), the earnest money does go back to the Boston condo buyer. However, if the buyer violates the purchase agreement, even if they simply change their mind about buying the home without a valid reason to point to, the money goes to the seller. It’s considered compensation for the selling party’s loss of time (which is of the essence, especially in Boston real estate) and effort. There are numerous ways a buyer can back out of a Boston real estate transaction and get a full refund, the most common are: buyer’ disapproves of the inspection results during the designated inspection period, or the home fails to appraise for the agreed on sales price.
True or false? My real estate agent gets my earnest money.
Partly false. In Massachusetts, the Boston real estate brokerage does hold on to earnest money before it gets transferred to the seller, They hold your earnest deposit in an neutral escrow account, like a bank account, set up specifically to retain these funds. In the event that the deal falls through, they either return the money to the buyer or give it to the seller, depending on the terms of the purchase agreement. Beware your contact with your real estate agent! It is possible the real estate agent is due part of the earnest money in case of a sale fail. (My personal policy and contracts have the client getting 100% of the earnest money in the event of a sale fail, but not all contracts are the same!)
True or false? The buyer is responsible for the entire escrow company fee.
False! It depends on the agreement, but typically the buyer and seller split the escrow fee 50/50.
True or false? There’s no set amount or percentage for the earnest money needed to buy a home.
True! It’s up to the seller to decide what they feel comfortable accepting as compensation for their risk in signing a purchase agreement with the buyer. Usually this is somewhere between 1 and 2% of the total purchase price. Sometimes it’s a set amount, like $5,000. In real estate markets like Boston, where homes are moving quickly, more earnest money is preferred because the seller is putting more at risk by taking their home off the market (they might miss an even better offer!) However, I never recommend earnest money in an amount higher than $10,000. Why? If there is a legal dispute over the earnest money $10,000 and below can go to small claims court, but amounts higher than $10,000 cannot. If you’re not sure what to expect, talk to your real estate agent!
True or false? Working with a escrow/title company eliminates the need for a real estate agent.
False. Although the escrow or title company does some important work, such as checking for liens on the title and acting as a neutral party to hold funds for both the buyer and the seller, they don’t act on behalf of either party. When it comes to negotiating the deal itself, you need a real estate agent who knows their stuff. Put another way, your real estate agent is the car that drives you from point A to point B (not owning a home to owning a home, or vice versa) and the escrow/title company is strong, sturdy bridge that you drive over to get there.
True or false? I don’t need to do anything while my home is in escrow.
False, false, false! “In escrow” is a period of time created so that certain conditions can be met for the home to close. The buyer will typically apply for their loan, order inspections, negotiate repairs, order the appraisal and more (all with the help of their buyer’s agent). The seller must negotiate repairs, arrange for inspections and appraisals, sign paperwork, and pack. Their listing agent will help with everything but the packing! Plan on communicating with your real estate agent often during this phase of the home buying or selling process!
True or false? I can set the escrow period that works for me.
Partly true. Home buyers need to check with their lender to make sure their lender can meet the closing deadline. Sellers also need to be sure they can move out and clean up the house by closing date.
True or false? Some title/escrow officers are better than others.
True. Let’s be honest. Some people shine in their jobs and others seem to take joy in making it difficult for everyone! As an experienced Boston real estate agent, I’ve worked with many escrow companies and officers and I definitely have created my preferred list. As your agent, I would be glad to give you a referral to someone who can make the escrow process a dream.