Earnest Money Deposits & Contingencies
By Paul Esajian on June 23, 2014
It is always a little unnerving taking the step from a prospective investor to putting your name on a contract. The biggest reason most new investors are apprehensive about buying is because they are scared to lose money. This is certainly a valid reason, but many aren’t aware of just how the purchase process works. Even though you may be putting money down with the realtor in the form of an earnest money deposit, it does not mean that you are bound to the purchase.
As a buyer, you are offered two main forms of protection in the form of contingencies: inspection and financing. If something comes up in either of these two areas that negates the approval or draws a red flag on the property, you can back out and get your money back. The inspection is done within a few days after the offer is accepted, ranging anywhere from five to fifteen days. Typically, the shorter the inspection period, the more serious you are perceived as a buyer. Regardless of time and regardless if the property is listed “as is” or not, you still have the right to get an inspection and back out if issues come about. All the “as is” portion of the contract means is that the seller will not come out of pocket or reduce their price if there is any work that is needed. Instead of negotiating back and forth on the condition, the seller is putting it out there that the property is being sold as the seller sees it.
If there are issues with the foundation, roof or anything else that draws your attention, you can try to make a counter offer, but in most cases it is up to you to determine if the reduction in price is worth the value given the condition and the work needed. If you are not comfortable after the inspection, you can inform your realtor and have your deposit funds returned without penalty. The same goes for the financing contingency. Bank financing has gotten much more difficult over the past few years. Every deal and application is looked at with a fine tooth comb. If something comes up on the credit report or tax returns after the initial loan is received and your application is rejected, you can still get out of your purchase. This certainly wouldn’t be a good situation, but at least you can get your funds back and address whatever problems came up with your loan.
Your earnest money deposit (EMD) funds are held by your realtor in a dedicated account and deducted from the closing costs at the closing. Your realtor, or the selling agent, is simply holding your money as a way to show that you are a serious buyer. If you decide to work with someone else or on another property this is your money and can be returned at any time unless you have an outstanding offer out on a property. The only time that your money will not be returned is if you have a change of heart about a property and try to back out. The seller has the right to hold that money and in most cases they do. This is why it is important to make offers on properties that you like and are ready to move forward with.
Contingencies offer you protection from the property and from unexpected financing issues. The only way you will lose money before you take ownership is if you decide you want to back out.