What is an EMD and How Much Should It Be?
An EMD (earnest money deposit) also known as a good faith or contract deposit is a deposit given by the buyer to the seller demonstrating his serious intention to purchase a given property until full financing is in place. The buyer makes the deposit upon signing the contract of sale, and that deposit amount is deducted from the sale price agreed upon by both parties. An EMD is typically held in an escrow or trust account.
The amount of the deposit varies based on the type of property being purchased and local market conditions. A typical deposit is usually 5-10% of the agreed upon sale price. The exact percentage may vary and is negotiable depending on the number of contingencies in the contract and how long the time frame is toward the closing date.
Usually the seller’s agent receives the funds and, as mentioned above, places it in an escrow account. The trust or escrow account will be managed by an independent third party, usually a title company or real estate attorney who conducts closings. Also, under Florida law, the funds must be placed in the trust or escrow account within three business days of receipt. EMDs cannot be released if the transaction fails to close without the agreement of both the buyer and seller.
Very importantly for a buyer to keep in mind is that the contract stipulates under what conditions he would forfeit the EMD. If, for example, the seller meets all the conditions and terms of the contract, (but the buyer does not), the seller will keep the earnest money. An example of this scenario can occur if the buyer does not have a mortgage contingency in the sales contract, and he fails to obtain a mortgage. Alternately, if the seller fails to meet the terms of the contract, then the buyer receives a complete refund of the EMD.
Remember, a real estate contract is legally binding, and the seller and buyer are bound by it. Therefore, it is imperative to retain a good agent/lawyer and to be sure that you, the buyer, fully understands the terms of the contract.