Buying a home is a goal for many residents in New York. The process of completing the purchase can be tricky, though. Residential real estate is so expensive and takes so long to close that a large deposit is involved in the process. Understanding how an earnest money deposit should be handled is key to ensuring a smooth transaction and avoiding some common real estate scams.
Understanding earnest money
Simply put, earnest money is used to show that the buyer is serious about entering into a contract. This can put the seller’s mind at ease. No one wants to move forward with one purchaser without some proof that they can bring the purchase agreement to completion.
Usually, earnest money is valued at between 1% and 5% of the total purchase price of the home. It’s put down at the time the parties sign a purchase agreement. In a residential real estate transaction, it’s possible that the would-be buyer can lose this money if they don’t follow through with their end of the contract. Because of that, it’s important for people to be really serious before taking this step.
It’s also crucial for first-time buyers to understand who gets the earnest money. It does not go to the seller. Instead, it’s held by a third party until the contract is complete. Usually, this is a title company, law firm, real estate brokerage or similar. If a seller asks for earnest money directly, this can be a sign of a scam.
When making any big purchase, it’s a good idea to talk to an attorney. Having a lawyer look over contracts is always prudent. They can work to ensure that your interests are represented, and they may be able to let you know about illegal provisions in a contract.