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What is Earnest Money or Hand Money?

Earnest money or hand money piggy bank and house.

What is earnest or hand money, and why is it important to collect from a potential buyer?  

Earnest money is just like it sounds. It means that the potential buyer is sincere in his desire to buy your home. It helps to weed out those who waste your time from those who are genuinely looking to buy. 

After negotiations have been agreed to on purchasing a home, the buyer will provide an earnest money deposit. In our Pennsylvania sales agreement, the line on the sales agreement reads, “Initial deposit, within ____ days of Execution date if not included with this agreement.”

The number of days is a negotiable item. The standard default written into the agreement is five days. The broker agency for the buyer will usually hold the hand money in an escrow account until closing. In some cases, a title company or real estate attorney will have the earnest money. The purpose of holding earnest money in escrow is to ensure that the transaction is completed and that the funds aren’t dispersed until it is. It protects both the seller and the buyer until all the documents are signed, and the home changes ownership.

When the closing occurs, this money will be applied to the buyer’s down payment and/or closing costs.

Keep in mind that earnest money does not always lock a potential buyer into the purchase. Contingencies in the sales agreement may allow the buyer to be released from the contract and have their earnest money returned to them. The contingencies are related to the buyer’s due diligence, inspections, mortgage, Homeowner’s Association document review, appraisal contingency, and any other items agreed to by the buyer and seller. If an issue arises with these contingencies, the buyer has a right to get his money back. 

There are no set amounts required for the amount of earnest money to be collected. Consult with your real estate agent to determine what is acceptable.

The supply and demand of the market can also impact the amount of earnest money required. Again, this money must be held in an escrow account until the sale is finalized. The seller does not receive this money. 

There are a few situations that would allow the seller to receive the hand money. But, if the buyer chooses to terminate due to an agreed-upon contingency in the sales agreement, funds will be returned to the buyer.  If the buyer just decides he doesn’t want the house at the last moment even though all his conditions or contingencies were met and breaks the deal, then the seller can be entitled to keep the escrow.

This is not a part of the negotiations to be overlooked. For the majority of the sales contracts, there are no issues throughout the sales process. But, occasionally, we are in a situation that the hand money becomes essential.

Talk with your real estate agent to get a clear understanding of the importance of earnest money in any sale, whether you are a buyer or seller.

The SAYHAY Team works to protect their client’s interests. Contact us at 412-755-3600 for a free consultation.

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