One of the questions that arises on a regular basis when helping someone buy a Myrtle Beach home has to do with earnest money. First, what is earnest money? Wikipedia gives a wonderful definition of the term here. Basically, it is the deposit made towards the purchase of real estate and is part of your down payment. In South Carolina, this money is held in a trust account of a real estate company or closing attorney. It cannot be used by the real estate company for any other purpose.
So, here is the big question that normally comes up in regards to earnest money is How much should I give for earnest money? People are looking for some sort of formula to calculate out how much is needed. Unfortunately, there is no exact formula to determine how much for your offer. Some use the 1% of purchase price principal, but that does not always work. For example, if you are buying an $75,000 condo, you may want to offer more than 1% or $750.00. In this scenario you may wish to offer $1,000.00. On the other hand, it could be some sort of offer where you are limited on money for down payment at the time of making the offer and only have $500.00. This amount is something that can be negotiated just like any other part of the offer.
The key concept behind earnest money is that it is the money you use as part of a down payment and is given at the time of presenting the offer to show good faith or earnest in a property. The more that you put down shows a higher level of genuine interest. You do not want to put too much money down because you do run the risk of possibly losing that money. However not enough can offend a seller. Here is an example.
A few years ago we had a gentleman in town that wanted to purchase a 22 unit motel that was for sale for $660,000. The gentleman made a fairly reasonable offer on the property and wanted to close in a rather short time of just over 30 days. He was supposed to pay cash for the deal. So, when we asked how much he wanted to put down as earnest money, he stated that he didn’t have the money at this time, but it was “coming soon.” He never would tell us where he was getting the money or could provide us with proof of funds. So we asked once again, how much would you like to use as earnest money.
The gentleman reached into his pocket and pulled out a dollar bill and slammed it down on the desk and said: “Here is my earnest money. And I am not putting another penny down!” A single dollar, that was his earnest money. Needless to say when we presented the offer to the seller, they were not amused by this offer. In fact, they were so annoyed that they flat out declined the gentleman’s offer.
This is a prime example where not enough earnest money caused a seller to not even want to negotiate with a buyer. The reason the seller was so offended is that if the gentleman changed his mind about purchasing and walked away from the deal, the seller would only receive $1.00 for incurring all types of expenses for various tests, inspections, attorney fees, etc, all while taking their property off the market during that time.
Hopefully this clears up the issue of earnest money a little bit. In closing, I leave you with this piece of advice in regards to earnest money. Each and every market all around the US is very different in regards to how much is enough/not enough. I would strongly urge you to ask a local REALTOR® for guidance when determining how much to give.