Earnest Money. The high-impact game changer in real estate negotiations.

The simplest way to make your Offer stand out to the Seller when competing against multiple Buyers is the amount of earnest money you propose. Often overlooked, the earnest money is a low risk, impactful psychological difference-maker in residential purchase negotiations. The agent who suggests a buyer-client offer the least or typical amount of earnest money unintentionally undermines an otherwise impressive Offer. 

Buyer-favorable rules protect the earnest money

Earnest money is a downpayment a buyer may submit with their Offer or after their Offer is accepted by the Seller. (Some states refer to acceptance as ratified.) Acceptance, unless otherwise agreed, happens when both parties sign the identical Offer stating they accept the terms as written. Once deposited in a Trust Account, Wisconsin law determines where and when earnest money goes to the Seller or the Buyer if the transaction doesn’t close. For reasons we won’t get into, ninety-nine percent (or greater) of residential offers include a promise to present a personal check within a few days of acceptance of the Offer. Because you put no money on the line until the Seller commits to you, it’s easier to promise to pay an amount that may persuade the Seller of your sincere commitment. 

Typical Amounts Tell The Seller You’re Typical

If you were the Seller and not the Buyer, given a choice, if all else is equal, do you choose to commit to the typical Buyer or the Buyer who impresses you as most ready, able, and engaged? Which one is most likely to get to closing without stumbling? Of course, it’s the person who puts their money where their mouth is. 

Typical earnest money is one percent of the purchase price. On a three hundred thousand dollar offer, $3,000 is the amount the Seller is most likely to see offered by typical buyers. It’s hard for Sellers to ignore a good offer with substantial earnest money, and the Buyer who makes that Offer is one with whom the Seller is likely to want to find a way to come to terms. How much money is substantial? If you’re going to put down 10%, half of the downpayment is certainly noteworthy. 

The Greater Your Risk, The Greater Your Commitment

You and I know that earnest money rules protect the Buyer from the risk of losing their earnest money except in cases of breach of contract. Don’t take my word for it; talk to real estate attorneys who resolve earnest money disputes. Even the Buyer who acts in good faith might still find a seller reluctant to release earnest money at first. Lawyers know that even in the cases of intentional breaches, the Seller’s best option may be to release the Buyer and move on to the next Buyer. Cases that don’t end in mutual release with no money going to the Seller are more likely to end up with money divided between the Seller, lawyer, Buyer, and lawyer. 

Earnest Money Tells Your Level of Commitment

A person’s commitment to getting to closing is evident by the terms included or excluded from their Offer. Contingencies that provide opportunities for a buyer to reconsider or renegotiate are neon-light red flags. Conservative amounts of earnest money send a message that you’re cautious. The typical home buyer is cautious. In competition, you do not want to appear cautious, or typical, or common if you are none of those.  

Bold, confident, committed, fearless Buyers are ideal partners for risk averse Sellers in a real estate transaction. Promising more earnest money is a simple, low-risk way to complement a well written, contingency-light Offer to purchase. 

Author: Tom Meyer, Owner-Broker, Essential Real Estate, LLC Madison, WI

The real estate transaction, disclosure, and confidentiality are the business of a Wisconsin licensee. It's in the transaction where the skill of the licensee, and their commitment to the law where the public is protected or placed at risk. What you see REALTORS do to brand themselves and their firms, promote their service, advertise, and process paper do not require a license. I believe negotiations to create and honor a real estate purchase agreement is where the agent has the greatest value in a transaction. Paying professional fee rates for the administrative services is a choice consumers deserve. Old business model driven commission rates are taxing the home equity of American home sellers. Essential Real Estate was created to put more money in the hands of the consumer by eliminating expenses for the firm and charging a fair price for the real real estate service.

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