What is EMD? How much is it and how you can protect it.

Another Las Vegas guide for protecting your money or losing it all.

EMD is short for Earnest Money Deposit also known as the good faith deposit but it doesn’t have to be something you gamble. The Nevada Law and Reference Guide says “Earnest money is not consideration – it is an inducement to negotiate. Earnest money is presented with an offer to indicate the genuineness of the offer.” So what this really means is that as a buyer you’re providing an act of good faith to the seller to make sure they know you are serious about the deal. The EMD amount is clearly stated in every Residential Purchase Agreement and not money on top of the deal. The example contract snippet below if from a recent contract from Las Vegas Realtors Assocation

Example of a Nevada Residential Purchase Agreement earnest money line 12

When the buyer’s offer is accepted, one of the first things the buyer will do is wire the EMD to the escrow company and this is what really solidifies the deal. The EMD is not money on top of the deal, it’s money that’s already part of the deal, the EMD comes out of the down payment which is stated in Residential Purchase Agreement (RPA). Every RPA has to be signed off by the client, an RPA is also known as residential sales agreement, or even just plainly an “offer”. If I’m speaking with a client I’m asking them to sign off on the “offer” not the RPA, if I’m discussing the agreement with another agent most likely the term used will be RPA.

The EMD can be used as a negotiation point in which a higher EMD would entice a seller to go with the buyer’s offer or a lower EMD you protect your buyers offer more. As a Buyers agent there are many ways to protect your buyers EMD and many things that have to be done in a timely manner in case the transaction goes south and the seller tries to keep the EMD, by law certain contingencies must be fulfilled. For example, if the seller does not send the buyer’s agent the SRPDs (sellers real property disclosure) within 5 days then the buyer is entitled to cancel the deal without any penalties. If HOA documents aren’t sent to the buyer within a certain amount of days then a buyer can receive his EMD back without any penalties. The home inspection contingency, appraisal contingency and loan contingencies are all points in the transaction which the buyer can get back their EMD. Protecting your clients EMD is important and should be a main priority for any agent. Lastly EMD gives the buyer extra time to finalize financing, conduct the title search, property appraisal, and inspections before closing.

While the buyer and seller can negotiate the earnest money deposit, it often ranges between 1% and 2% of the home’s purchase price, depending on the market and is listed on the MLS listing. In hot housing markets, the earnest money deposit might range between 5% and 10% of a property’s sale price.

How Do You Lose Earnest Money?

In an agreement between a buyer and seller, there are often a number of contingencies outlined that spell out the terms where a buyer may back out of an agreement. These contingencies mentioned above include the home inspection, appraisal contingency, loan contingency.
If the buyer decides to not proceed with the sale for reasons outside of these agreed to contingencies, the buyer is at risk of losing earnest money. In a real estate contract many things are negotiable, so no matter what, communication is key when working a deal to avoid losing any EMD.

Here are some of the top questions I run into as an agent about losing EMD…

1) If the buyer is turned down for a loan does the buyer get his earnest money back?

Generally, yes. If the buyer has fully complied and done everything within his power to obtain the loan but still doesn’t qualify, he would be entitled to his EMD back.

2) If the buyer cancels during the Due Diligence period, is he entitled to his EMD back?

Yes. If the buyer finds something adverse in the property inspection, he is generally entitled to cancel the agreement and have his EMD returned.

3) If the buyer defaults prior to the close of escrow (COE), is the EMD refunded?

Baring unusual circumstances, the buyer’s cancellation for no reason prior to the COE would allow the sellers to properly retain the EMD.

4) What should be done if there is a dispute about who is entitled to the EMD?

The first step would be mediation. Most standard purchase agreements have a mediation clause to allow the parties to resolve their differences. Your local association has a mediation program available for disputes regarding earnest money.

The Bottom Line

When a buyer and seller enter into an initial agreement to transfer ownership right of property, the buyer is often required to make a deposit of earnest money into an escrow account. There’s a number of reasons the buyer and seller can agree to where the buyer can back out of the agreement. However, should the buyer break the contract or not meet required deadlines, the seller may be entitled to keep the earnest money as compensation for the break of good faith.

Check out our youtube channel for a quick short! or Contact Us if you have questions!

Youtube Short on EMD

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