top of page

Understanding Escrow and Earnest Money

Updated: Sep 7, 2023

A real estate agent understands the importance of an escrow and earnest money. If you’re selling your home by owner, you need to know what these are and how they apply to you.

Earnest money is just like it sounds. It means that the potential buyer is earnest in his desire to buy your home. While you don’t necessarily have to have earnest money when you’re selling your home by owner, it’s a good idea.

It helps to weed out those who waste your time from those who are truly looking to buy. If you and the potential buyer are able to iron out all the issues during the negotiation, that earnest money is then considered part of the cost of buying the home.

It gets counted as part of the down payment if one is required or it goes toward paying the closing costs. Keep in mind that earnest money does not always lock a potential buyer in.

If, during the home negotiation, an issue arises with the house, the buyer has a right to get his money back. If you don’t know what to charge for the amount of earnest money, you can look at what the laws are in your state regarding that if there are any.

As the usual rule of thumb, at least 1% of the home’s value should be offered. Some real estate deals though have set amounts in place as the earnest money such as $1,000 to $2,000.

The supply and demand of the market can also impact the amount of earnest money required. You can’t spend the earnest money that you receive. You have to place that money in an escrow account until the home sale is finalized.

Escrow is basically the same thing as earnest money. It just means that it’s where the earnest money is. Escrow funds are kept by the person dictated by the laws of your state.

In some cases, it’s going to be the title company representative. It might be the company handling the closing or it could be a real estate attorney. This is known as third party handling.

The purpose of this is to make sure that the transaction is completed and that the funds aren’t dispersed until it is. It protects both the seller and the buyer until all the documents are signed and the home changes ownership.

It’s a way of making sure that all the agreements or contingencies between the parties were met. If, at the last moment, the buyer just decides he doesn’t want the house even though all his conditions or contingencies were met and breaks the deal, then the seller can be entitled to keep the escrow


1 view0 comments


bottom of page