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| Unlike a tiny deposit, Mousse is never insincere |
How much is just enough? It is a universal question running the gamut from chocolate mousse consumption to the amount of deposits to extend when buying a home. With deposits laid down when buying a home, just enough to get the job done is always the right amount. If you put down too small a deposit when negotiating a home purchase, your interest may appear insincere or dilatory. You could even see your offer lose out to another buyer whose deposits are more substantial. But a worse fate could be oversizing your deposit, only to have it tied up in escrow and out of your reach.
In most offer scenarios and agreements of sale, there are two
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| Bought with Ernest Money: Papa's Key West Home |
times when the Buyer delivers deposits to a Seller. The first deposit is called Earnest Money, because Ernest Hemingway initiated the concept when he purchased his Floridian compound. Earnest money is an initial deposit that one includes with a written offer to purchase. A very typical earnest money deposit on a house priced between $100,000 to $500,000 is about $2000.
As the name implies, this money is a gesture that your offer is being tendered with earnest intention. Since many offers are sent electronically, it is doubtful that your Earnest Money check will ever be cashed, or even delivered, unless your offer to purchase is accepted. And even if an offer is accepted and the $2000 earnest money check is cashed and deposited, most agreements of sale dictate that Buyer has 10 days to cancel the purchase and be entitled to a return of all deposit monies.
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| Rightly or Wrongly, Sellers can tie-up $Escrow |
But even though the rules say Buyer has the right of full refund, a speedy refund of deposit money depends on the Seller agreeing to its release from escrow. Most Sellers respect the rules as they are written and don't hesitate to a sign a release of Buyers deposits. But if there is any intrigue or dispute during dealings to purchase - or even if the Seller is just daft and feels like being difficult - the Seller can stand in the way of the Buyers' rightful refund for any reason valid or not. If the seller refuses to budge, the Buyers' money will remain in an escrow account until a hearing can be held to adjudicate and affect the rightful return. So yes, the Buyer will get its deposit money back, but it might take months to process if the seller is unwilling.
This might not be devastating if the amount in question is only a $2000 earnest money deposit. But if the much more substantial Second Deposit has already been made, the stakes are much higher. Typically, a Second Deposit brings the total amount of deposit money up to about 5% of the purchase price. So on a $400,000 purchase, which included $2000 earnest money, the Second Deposit could be as much as $18,000.
Buyers make this Second, Substantial deposit once their 10-day,right-to-back-out period has expired. The
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| Buyers' deposits into escrow are Sellers' vital security blanket |
big Second Deposit, and the earnest money deposit, are Not Refundable at this point. These deposits are the Sellers' security that the Buyer will show up for closing and complete the purchase. This deposit has to be large enough so that it would significantly hurt the Buyer - and adequately, compensate the Seller - should the buyer not follow through as per the agreement of sale.
A Buyer can enhance his appeal to a seller by offering a large Second Deposit that is equal to, or exceeds 5% of the purchase price, thus offering the seller greater security that he won't skip town or back out of the deal. If a buyer has, say, $80,000 down money (20% on a 400,000 home) readily available, he could really impress a Seller by offering to put it all up after only 10 days. He might miss out on a few dollars of interest by having the money sit in an escrow account for a month or two, but by settlement time all his down payment has already been taken care of.. And, he might very well strike a better price on the house - or beat out other competing buyers - because he has 80,000 reasons to make good on his purchase. If you were a Seller, would you want the Buyer with 80,000 reasons to perform, or the one with only 20,000 reasons (5% non-refundable deposit) to perform?
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| Asteroid strike could affect timely release of Deposits |
But now comes the downside to wowing a Seller with big deposits. If anything goes wrong with the deal before settlement - say, maybe a problem with the mortgage, maybe an asteroid falls on the house (with nobody home of course), if for any reason a smooth settlement does not occur, the Buyer is dependent on the Seller to agree to release the deposit money from escrow. The seller may or may not have a good reason to sign off on a speedy return of Buyers' deposits, but a Buyer wants to have as little deposit money (as possible) at risk of being tied up.
Every buyer is going to have a bit of a risk with deposit money potentially being tied up. But you want to minimize that risk as much as possible. By the same token, you may have to pay a higher price or lose out on a deal if your deposit monies don't express substantial gravitas and intent to perform.
