Selling Smart: Require Enough Deposit To Secure Contract
When buyers are in the driver’s seat in a real estate market, it makes sense for sellers to be flexible (even generous) with concessions and incentives, in order to get a sales contract. However, as a home seller, one thing you should insist on is a good-sized earnest money deposit (also called “consideration” or “good faith deposit”).
Earnest money functions to enforce the buyer’s promise that he or she will fulfill the terms of the sales contract. The deposit is usually held in an escrow account and eventually used as a credit toward the buyer’s settlement or closing costs and down payment.
There may be contingencies in your contract that, if unfulfilled, would allow the buyer to walk away and get the earnest money back. But if the buyers simply change their minds–perhaps after finding another home in another location or at a different price–they would have to give up the deposit as a penalty for not following through on your contract. You want the deposit to be large enough to deter the buyers from backing out of the deal, but not so large asto discourage buyers from entering into a contract with you.
How much earnest money should you require? Different markets around the country have their own customs regarding deposit amounts. Even so, the norm may be a range from, say, 1% to 3% of the sales price. In some situations, say if prices in the area are dropping, you may want to ask for a deposit on the high side of the norm. You might also want to consider lowering your sales price a little in return for a larger earnest money deposit.
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