This sponsored, biweekly Q&A column is written by Andrew Goodman, broker/owner of Goodman, Realtors. Based in Bethesda, Andrew serves clients in Maryland, D.C., and Northern Virginia. Please submit comments, questions, and opinions in the comments section or via email.
Question: What is a deposit and what is an appropriate deposit amount to submit with an offer?
Answer: A deposit is a form of consideration, which makes a contract valid. A contract has to have some form of a deposit for it to be considered a valid and enforceable one. A check is the most common form of a deposit.
A deposit, otherwise known as an Earnest Money Deposit (or EMD), is submitted with an offer to show good faith to the seller that the buyer has no intensions of walking away from the transaction. This holds the property for the buyer through the purchase process so no other buyer can snatch it out from under them.
The amount of the deposit can vary depending on the purchase price and the market.
One percent of the purchase price is usually the rule of thumb for making a deposit on a residential property. However, the higher the deposit the stronger the offer is.
For instance, if the offer price is $100,000, the seller may not accept a $1,000 EMD because $1,000 is probably not enough money to prevent a buyer from walking away from a contract.
From a seller’s standpoint, the deposit should be enough that the seller feels the buyer would think twice before walking away. As a buyer’s agent, I always recommend at least a $5,000 deposit. If you were purchasing a $1 million house, I would recommend at least a $20,000. Again, the higher the deposit the stronger the offer.
From a buyer’s standpoint, the buyer obviously wants to keep the EMD as small as possible. Not too small — as the buyer still wants to be taken seriously by the seller. But small enough that in the event the worst happens, the buyer wouldn’t be in a really bad situation if he or she were to lose the deposit. In a “hot” market, the buyer can use a strong deposit to make his or her contract stand out from the pack and may even sway a seller into choosing that offer over another.
Remember, there are most likely contingencies in the contract to prevent the buyer from losing his or her deposit if the transaction were to fall apart. Your Realtor should be able to advise you as to which contingencies should be used in your offer. All of the contingencies used are to prevent the buyer from losing the deposit or securing the seller’s investment.
Once an offer is accepted, the deposit is placed in an escrow account. Typically, the deposit is held in the settlement company’s escrow account. The funds from the buyer’s deposit check will go toward the amount the buyer owes at settlement. This could go towards the buyer’s down payment, and perhaps their closing costs.
A Realtor’s job is to protect the interests of the client, including that client’s deposit. Follow the advice of your Realtor to determine the best way to protect your interests and prevent potential problems.
