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