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You include earnest money with an offer on a house to show the seller that the you are 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 you pull out of the deal for reasons other than those stipulated in the offer. A financing contingency is an example of the latter - if your offer was contingent on getting a loan, and you can't, you can cancel the contract and get your earnest money deposit back.

How Much Earnest Money?

The size of the earnest money deposit is up to you. Real estate agents will sometimes outright lie, and tell you it is this or that amount, or this or that percentage of the offering price. In reality, you can write the offer with a one dollar deposit if you wish, and agent still has to present the offer.

Naturally, an offer with one dollar of earnest money may not be taken seriously, and the agent may even persuade the seller to reject your offer. It is a good idea to ask what the local norm is. We just bought a house 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.

You can also do a two-part deposit. You can 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. This will usually still be seen as a serious offer if the deposit is to be seriously increased at some point.

Who Gets The Earnest Money Deposit?

Never give your earnest money check to the seller. The last thing you want is a seller trying to keep your money after you pull out of a deal because of financing problems, termite infestations or other valid contingencies in your offer. If the real estate office 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, but in any case, always give your deposit to a third party to hold.

Ask how they handle 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.

How To Protect Yourself

Things can happen, right? If you pull out of the deal for some unforeseen reason - one not included in the contract - you'll lose your deposit. However, the seller could also sue you for additional damages or even force you to buy the home. To protect yourself, have a clause in the offer that specifies the earnest money as "liquidated damages" if you are in default. The real estate agent can help with the language, but this basically means that if you need to default on the contract, the seller can't ask for more than what you have already included as earnest money.

I just had to share this.

I had just gone to the post office to pick up my mail in the morning, after that I was on my way to my office. When all of the sudden a block away from there, I see an attractive For Rent sign.  It read, "House for rent, 3bed 1 bath and 2 car garage, for $1,100 a month" Considering the area, and the features of the house it seemed like a very good deal. I wanted to rent it myself. Right away I called the number, and the man who answered wouldn't give me the address of the house. He told me that he'll tell me the address when he get's to the house in 15 mins.  He called me and showed me the house, the house was near by. When I saw it, I was impressed; the house was in great condition. I told the guy that I wanted it, but he wanted for me to give him cash, cashiers check or money order. I made an appointment with him, at the end of the day so I can show it to my wife, to see if she liked it too. Also to give him the money.
 

I was still thinking of the house the rest of the day, but I saw that it had combo lock boxes, and an electronic box keys that Real estate agents use, but not a for sale sign. He had told me that they were there for other agents to show it and rent it. Still when I got home, I logged on to the Home Search system and looked it up. Turns out it was For Sale, I called the listing office and they said: IT'S NOT FOR RENT, IT'S AN REO LISTING". Man I was so mad. I told the listing office of the situation, so they put a for sale sign back on right away the next day. The guy wanted to scam me for my money!!!!  He wanted first months rent, last months rent and $1,000.00 for cleaning deposit. That was a total $3,200.00. I got to be careful next time.

Now, this is one of the first things I tell people who are looking for a house to rent. Be aware.

After that, 3 weeks later, one of my clients calls me and tells me to look up an address for him, to see if the house was for sale. I looked it up and it was for sale! Then I noticed his his reaction. He said, the house only had the post, but not the for sale sign, and that he had given $1,800.00 cash to rent this house, to this man that showed him the house, they didn't do a contract or got his information, they just did a verbal agreement for the mean time and a contract later. So this guy just got the money and disappear, so he got away. My client tried calling him but hi's number all of the sudden got disconnected. TOTAL SCAM ARTIST!!

Now, I'm advising all my clients, renters, friends, realtors and also REO agents,  about these scams, BE CAREFUL OUT THERE.