GOOD FAITH DEPOSIT IN REAL ESTATE:  HOW TO MAKE IT WORK TO YOUR ADVANTAGE WHEN MAKING AN OFFER ON A HOME

Published 07-11-2019 By Rico Castillo

A good faith deposit can be a powerful tool to make your offer stronger.

“But what is a good faith deposit?” you ask.


Don't have enough for a deposit?  Alternative Financing and Lease with Option to Own programs exist.  Read this article on it.

Photo and License by Marco Verch


Let me step back a bit.  This deposit has a couple of different names.

The inside lingo within the real estate industry is “EMD,” which is short for Earnest Money Deposit.  However, it’s also known as an Initial Deposit or Good Faith Initial Deposit.

For the sake of making this simple, we’ll just refer to it as Good Faith Deposit.

WHY DO I HAVE TO PUT DOWN A GOOD FAITH DEPOSIT?

In an article by Rudman Winchel, Real Estate Attorney, in her site, https://www.rudmanwinchell.com, she writes, “A Purchase and Sale Agreement is a contract for the sale of land.  In order to have a valid contract the law requires that there be an offer made, an acceptance and consideration for the contract.

Short answer to your question is - it is required to make a contract legal. 

Putting a good faith deposit down when writing an offer on a real estate property also tells the seller that you are a serious buyer.

If you make an offer on a property and not to put a good faith deposit down, there is a very good chance the seller won’t even entertain your offer.

First of all, I don’t think your agent will write that offer for you.  It’s a waste of everyone’s time.

Okay, so you’ve changed your mind and will put a good faith deposit down.  Good for you.

Now decide how much you’ll put down, because the amount you choose will  substantially increase your odds of getting your offer accepted.

HOW MUCH SHOULD I PUT DOWN FOR MY GOOD FAITH DEPOSIT?

The rule of thumb in a normal market is 1% to 2% of the offer price.  However, the more you can put down the better, because the seller’s agent will make a big deal of it to the seller when she presents your offer to her.

By putting a larger good faith deposit down than the other buyers, the seller will put more weight on your offer.  She will know you’re serious about buying her home and that you feel solid about your loan mortgage situation to close the transaction.

Your agent will advise and guide you as to how much you should put down as your good faith deposit considering what the local market trend is.

Typically the more you put down for your good faith deposit, the stronger your offer will be.


There is one situation where the seller and her agent will allow a much lesser down payment.  If you’re using a VA loan, which is a no-down payment loan and guaranteed by the government, then they know that a $500 down payment will be sufficient, since it will go towards the buyer’s closing costs and not towards the buyer’s down payment.


However, do not put more than $10,000.

Why?

Because if something were to happen in the transaction where the seller could possibly go after your good faith deposit, she has to go to small claims court.  The maximum she will be able to get is $10,000.

If you were to put more, the difference may still be in jeopardy, if the seller tries other ways to get it. 

It’s best to not put a good faith deposit down above $10,000.

This rule goes out the window, however, in high price point transactions.

WILL THE GOOD FAITH DEPOSIT GO TO THE SELLER?

The good faith deposit will not go directly to the seller.  It will be held in an escrow account at the title company.  It will be applied towards the overall money that you’ll need to come up with in order to close your transaction.

For example:  The money you needed to bring to the title company for your down payment and closing costs totals $20,000.  However, you’ve already given the title company $5,000 as your good faith deposit.  Therefore, the remaining amount you  need to bring in to title will only be $15,000.

However, there are situations where you could lose your good faith deposit.  Here are a couple of situations:

  1. You decide to back out of the transaction after you’ve release all of your contingencies - for reasons such as you lose your job or if you did a contingent offer and the sale of your current home falls through.  You’ll lose your deposit because the seller has been “harmed” by your action of backing out.
  2. The transaction goes south and you are at fault.  Again, this action also “harms” the seller.

There are other situations, but these are the most common ones.

So, be careful and make sure you have all your ducks in a row so you won’t get into these situations and lose your good faith deposit.  Make sure you work with an experienced and knowledgeable agent who can guide you properly throughout the complicated real estate transaction process.

Consider making a larger amount as your good faith deposit to make the seller feel more comfortable with your offer.  These funds will go towards the overall funds that you’ll need to bring to title to close your transaction anyway, so, why not, right?



You are here:   Real Estate >  Good Faith Deposit

Like this page?

You might like these

  • How to Properly price your home during COVID 19

    Have you ever wondered how real estate agents come up with a valuation of your home? In this article, I’ll show you how to properly price your home - especiall

  • Search Homes For Sale

    When you search homes for sale, though it can be exciting, it can be frustrating as well.  Know what to expect and avoid headaches.

  • Folsom real estate market

    Folsom Real estate is still affordable compared to the Bay Area with interest rates at historic lows and different programs to help you buy a home

  • Steps To buying A House! Part 3

    Steps to buying a house are steps that you want to get right. Home ownership is still a big part of the American Dream… Here’s what you need to know.

  • Steps To Buying A House! Part 2

    Steps to buying a house are steps that you want to get right. Home ownership is still a big part of the American Dream… Here’s what you need to know.

New! Comments

Have your say about what you just read! Leave me a comment in the box below.

Back to Top of Page




About the author: All of the articles in this site were written and provided by Rico Castillo (DRE# 01234643) with Coldwell Banker.  If any information is provided by another source, such as the local MLS or by Metrolist, then a disclaimer will be on that page.

Rico can be reached by cell at (916) 934-3146 or email at rico.castillo@cbnorcal.com.   Visit his YouTube Channel at https://bit.ly/3bAaZJs

My aim is always 100% client satisfaction by helping you accomplish your real estate goals and finding you the home you've Dreamed about in the area you and your family can feel proud and safe to live in!