Also known as a good faith deposit, earnest money is a deposit paid into escrow by the buyer in Hawaii, Maui and Oahu once the seller accepts the buyer’s offer to purchase real estate. The earnest money deposit is typically 1 to 3% of the purchase price and is applied to the buyer’s down payment at close of escrow.
How much earnest money should you require?
Most sellers prefer the buyer to put down 2-3% of the purchase price as earnest money when demand is high (a “seller’s market”). It is common for sellers to accept 1-2% when demand is low (“buyer’s market”), in some areas of Hawaii we see even lower,
From the seller’s perspective, the closer to 3% the better. Buyers can lose their deposit under certain circumstances, so committing to a higher earnest money deposit shows the seller that the buyer is serious and is more likely to close the deal.
If the buyer cannot deposit at least 1% of the purchase price as earnest money, sellers should ask hard questions of the buyer’s financial wherewithal ahead of time to ensure they feel confident accepting the buyer’s offer.
For example, sellers may want to ask to see the buyer’s credit score, bank statements, and any relevant accounts to show the buyer can afford the down payment and appears likely to receive a loan.
UNDERSTAND THAT, UNDER ALL CIRCUMSTANCES, INCLUDING DEFAULT, ESCROW WILL NOT DISBURSE EARNEST MONEY TO EITHER PARTY UNTIL BOTH PARTIES HAVE EXECUTED AN AGREEMENT AUTHORIZING THE DISBURSEMENT OR UNTIL A COURT OF COMPETENT JURISDICTION HAS DIRECTED A DISBURSEMENT.
If a deal goes south and you want to keep the earnest money regardless, for your time and trouble, please consult an attorney, and be aware if you have money in escrow, it ties your home up from being on the market.