Earnest Money Deposit (EMD)

TLDR: The earnest money deposit is the buyer’s promise to abide by the terms of the agreement. The buyer will submit their EMD after the contract is signed by both parties.

What is an Earnest Money Deposit? Where does it go? 

The earnest money deposit, often called EMD for short, is a small amount of money (relative to the purchase price) offered to you to demonstrate the buyer's bona fide interest in purchasing the property. It can also compensate you for lost time that you could have been marketing the property while it was on hold for the buyer if the buyer ends up backing out of the contract. If the terms and conditions of the contract are the rules of the game, then the earnest money deposit is what's at stake if the buyer doesn't follow the rules.

The earnest money is held by a neutral third party, usually deposited into an escrow account managed by the title company or real estate attorney who conducts the closing, to hold until closing. If the transaction closes, the buyer's funds end up going toward the house at closing. If the buyer doesn't adhere to the terms of the contract, you may be entitled to the earnest money deposit. However, if the buyer backs out for a reason stipulated in the contract, they will have their earnest money returned to them. 

Fun Fact

For a contract to be deemed legally binding, it must include consideration by the parties entering the contract. In the case of real estate offers, the earnest money deposit is the buyer’s consideration, and the promise to cease marketing the property is the seller’s consideration. 

How much is a typical earnest money deposit (EMD)? 

A standard amount is $1,000, but it could be as high as 10% of the purchase price in extremely competitive markets. The higher the EMD amount, the more the buyer is willing to put on the line as evidence of their commitment to purchase the property.

Fun Fact

Real estate investors who make large quantities of offers will sometimes offer as little as $10 for an earnest money deposit. 

Under what circumstances will I get to keep the EMD?

"What if the buyer demands a complete renovation after they see the inspection report? What if the house they have to sell before they buy my house doesn't sell? What if the house doesn't appraise?"

When in doubt, look to the contract. The only circumstances in which the buyer is allowed to terminate the contract are outlined in the contract. If the buyer backs out of the agreement for any reason not previously agreed upon, then you get to keep the earnest money deposit. Unfortunately for you, many of the reasons a buyer might back out–e.g. their financing falls through, the house doesn't appraise, etc.--are legitimate, justified reasons to terminate that are included in the contract as contingencies. This means that the buyer will have their earnest money deposit returned to them and you'll have to put your property back up on the market (womp womp).