What is Earnest Money in Colorado Springs?

Let’s talk a little bit about some of the money side of things for once. Now, Earnest Money…what is it, why is it important, who holds it, who gets it if the deal falls through?

What is Earnest Money and why is it important?

With such a heavy military presence in Colorado Springs we often find that a lot of VA buyers don’t even know that Earnest Money (EM) is a norm. While the VA loan is $0 down, it doesn’t mean that you don’t need any money to purchase…right! So, we typically refer to EM as ‘good faith’ money, but most people see it as a deposit on the property instead. A deposit has this feel of safety when you’re purchasing an item, yet good faith gives a little bit more wiggle room. EM, simply put, is money given in good faith by the Buyer to the Seller, a Title company, a Brokerage, or a third disinterested party. Essentially a party that is known as the Earnest Money Holder.

In Colorado Springs more often than not EM amounts to 1% of the purchase price, i.e. a $400,000 home may want $4000 EM. EARNEST MONEY IS NEGOTIABLE. As with 99% of items in a real estate deal, just because a standard is set, or a party requests it, does not inherently mean that it is the rule of law. Take for instance a military buyer in Colorado Springs. Most are well qualified to purchase $4-500k properties, however, they may not have immediate access to $4000-$5000 comfortably. Does that mean that they won’t be able to buy the property? ABSOLUTELY NOT. 

In fact, with the shift in the market, the vast majority of our VA buyers are offering $1000 EM and asking for seller concessions. We’re winning left and right. Bare in mind though that most homes are no longer in multiple offer situations so we can get away with it. Ultimately, if it’s a dream home or you are up against other players it’s best practice to offer what the Seller wants. In luxury properties it is not uncommon to see Sellers requesting 3-5% EM as the stakes are often higher, or the Seller wants to ensure there is more skin in the game, or perhaps even to prove that the Buyer is legitimately in a good enough position to buy the property. 

Where does EM go at closing?

Your EM money is not lost if you close on the property! It simply is counted as a credit towards your closing costs. Let’s say you gave $3000 when you contracted, your closing costs total $8000, you therefore need $5000 to bring to close. Interestingly enough most of our VA buyers are now getting their EM back at closing OR EVEN MAKING MONEY at closing. But, how? Seller concessions are amazing, if we can get enough in concessions from the seller not only can it cover your closing costs, but some can also come back to you at closing. 

Earnest Money Release...

Ah the bad part. Unfortunately in some rare occasions you may lose your EM as a Buyer. Fortunately, though, Colorado has adopted real estate contract policies that protect the Buyer significantly more than in other States and limit the options of a Seller in section 20.1.2. This section states that if a Buyer is in default the Seller only has the EM as recourse (liquidated damages). If EM is released back to the Buyer the Earnest money holder has three days to release it after the Seller has receipt of the release, and vice versa for Seller receiving EM.

So, how and when do Buyers lose the EM?

There are really two ways: acting in bad faith, and getting cold feet prior to closing. Most of the deadlines in the contract allow a Buyer to terminate for subjective reasons, and who is to say that your subjective reason is not good faith? But, let’s say you are 25 days into the contract and decide, nah - I don’t want this house, guess what... you’re likely losing that money. Either way, talk to your Agent when you have concerns, any of us will keep you in the loop with options and we have an exceptional track record of not losing EM. We will always act in good faith!

If you'd like to read more about money check this blog out: Why mortgage payments are rising