First time home buyer due diligence tips for earnest money agreements.

  • October 3, 2018
  • Posted by: admin
  • Category: Real Estate Post
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First-Time Home Buyer Due Diligence Tips for Earnest Money Agreements

When you’re making an offer on your first home, understanding earnest money agreements is crucial. Here are important due diligence tips:

Understand Earnest Money Basics

Earnest money is a deposit you make to show sellers you’re serious about purchasing their home. This deposit is typically 1-3% of the purchase price and becomes part of your down payment if the sale completes.

Key Due Diligence Tips:

  1. Include contingency clauses in your offer that protect your earnest money, such as:
    • Financing contingency
    • Home inspection contingency
    • Appraisal contingency
    • Title contingency
  2. Know your deadlines. Your purchase agreement will specify timeframes for inspections, loan approval, and other contingencies. Missing these can put your earnest money at risk.
  3. Document everything in writing. Verbal agreements aren’t enforceable when it comes to earnest money disputes.
  4. Understand what constitutes a valid reason to back out while still getting your earnest money returned.
  5. Use an escrow account with a reputable third party (title company, real estate brokerage, or escrow company) to hold your earnest money—never give it directly to the seller.
  6. Read the fine print about how and when your earnest money will be released if the deal falls through.
  7. Negotiate the amount if necessary. In competitive markets, larger earnest money deposits might strengthen your offer, but ensure you’re comfortable with the risk.

 

How to Avoid Losing Your Earnest Money When Purchasing Property

Earnest money is a significant investment, and protecting it should be a priority. Here are strategies to avoid losing your earnest money:

Include Strong Contingencies

  1. Inspection contingency – Allows you to back out if inspections reveal significant issues
  2. Financing contingency – Protects you if your mortgage falls through
  3. Appraisal contingency – Lets you exit if the property appraises below purchase price
  4. Title contingency – Ensures you can walk away if title issues emerge
  5. Home sale contingency – Protects you if you need to sell your current home first

Meet All Deadlines

  • Track every deadline in your purchase agreement
  • Set calendar reminders several days before each deadline
  • Complete inspections, loan applications, and document submissions promptly
  • Request extensions in writing before deadlines expire

Document Everything

  • Communicate important matters in writing (email or text)
  • Keep copies of all communications with the seller, agents, and lenders
  • Take dated photos of property issues discovered during inspections
  • Get written approval for any contract changes

Work With Professionals

  • Use a qualified real estate attorney to review agreements
  • Select an experienced real estate agent familiar with local practices
  • Choose a reputable escrow company to hold the deposit
  • Hire professional inspectors who document their findings thoroughly

Be Strategic With Contract Terms

  • Negotiate reasonable timelines for contingencies
  • Include specific language about earnest money return conditions
  • Define what constitutes a “material defect” that would allow withdrawal
  • Consider splitting the earnest money into staged deposits

Additional Protective Measures

  • Consider earnest money insurance if available in your area
  • Verify the escrow holder is properly licensed and bonded
  • Understand exactly what constitutes default under your contract
  • Don’t waive contingencies unless absolutely necessary and fully understood

Would you like me to elaborate on any specific aspect of protecting your earnest money?

Refundable Agreements

“We have learned that many first-time home buyers and even some investors do not know that a standard earnest money agreement is non-refundable. These buyers are also not always aware that a refundable clause can be written into the good faith agreement to protect their interests. For example, language outlining that the money is non-refundable contingent upon specific home inspection results, property appraisal outcomes, or additional seller disclosures. Well thought-out protective measures can be written into any contract to be executed by both parties for a successful transaction with minimal hardships”.

Helpful link: https://www.ustitlerecords.com/product/homebuyer-package/