What is a Good Faith Deposit, and Why Do I Need One?
November 25th, 2007categories: Anatomy of a Chico CA Real Estate Transaction, Chico Buyers, Chico Sellers
I’m always a little surprised when I sit down to write a purchase offer on Chico CA Real Estate for a new buyer, and they don’t have their checkbook with them!
A good faith deposit is an amount of money that the buyer submits with the offer to show that he or she is acting in good faith and intends to fulfill the terms of their agreement.
The deposit basically says to the seller, “I want your house badly enough, I’m willing to put my money where my mouth is!”
The amount of an acceptable good faith deposit varies widely by region.
In Chico, CA, a good rule of thumb is to offer about 1% of the purchase price for every 30 days in escrow. In other words, if you are offering on a $300,000 home and you are requesting a 60 day escrow, a $6,000 deposit will probably fit the bill. This is a very loose rule, however, and each transaction should be considered carefully. For instance, in a strong buyer’s market, it is likely that a buyer can offer a smaller deposit without too much grumbling from the seller. However, in a competitive situation where the property is bringing in multiple offers, a buyer can help make his offer more appealing by providing a more substantial deposit.
Your good faith deposit is typically held by the broker who is writing the offer for you. If I was acting as your buyer’s agent, I would accept the check on the seller’s behalf. Chico Homes would then hold it in a separately maintained trust account until your offer was accepted by the seller. Within 3 days of acceptance, the deposit is required to be deposited with the title company that will be handling the escrow. Your check should always be made out to the title company, not the agent you are working with, or the company where they are employed!
The seller is only entitled to keep your good faith deposit in the event that you, the buyer default on the contract.
It is important that you are very clear as to the terms you are agreeing to. If the contract says you have 17 days to complete your investigations, and you decide on day 25 that you no longer want the property because the house next door has barking dogs, you may sacrifice your deposit! Be sure to work with your trusted Realtor to adhere to the terms and timelines specified in the contract.
If the transaction proceeds without issues, the deposit is typically applied to the closing costs the buyer will incur during the escrow. In the event that both buyer and seller agree to terminate the contract, the buyer can receive his deposit back minus any inspection costs that he may have agreed to.
Have more questions? I’m happy to answer them! Sandi 530-864-5407
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Looking to buy or sell Chico CA Real Estate? Need a Top Producing Chico CA Realtor? Call Sandi Bauman 530-864-5407 or email sandibauman@sbcglobal.net. Specializing in REO, residential, relocation, investment & ag property.
Sandi, I’m glad you are trying to educate the Chico Californian home buyer- especially the first time buyer, on the ins and outs of real estate in Chico. it is so needed, I try and do the same with Charlotte buyers! Terry McDonald
The amount of an earnest money deposit seems to be somewhat of a local custom. I like the way it is done in Chico with a larger deposit for a longer escrow.
We have done similar types of arrangements in Wasilla but usually our deposits are smaller.
Sandi - Great article! You should make sure every client has their checkbook with them before you go looking at homes for sale in Chico.
I agree with the strategy of a larger earnest money deposit in a competitive situation. I recently got a client the home of their dreams where we competed against 3 other bids by offering 3% earnest money. The other agent told me afterward that this is what tipped the scales in the favor of my client. The neat part is this strategy doesn’t cost the buyer one penny extra! –Bob
Sandi-
Earnest money deposit is such an important topic to cover. It’s so hard to get first-time buyers to focus on the mechanics to writing an offer once they find the home of their dreams! If you can get them to read the contract- actually READ it- you have accomplished something.
We don’t have escrow here in Virginia- so maybe- sometime soon - you can explain it to us who are not so blessed.
Sandi - what a great explanation of good faith money. I really do like the way CA handles it. I have seen in my area offers with as little as $1000 on $3000,000 which just doesn’t seem enough to me. But as you say local customs. - Ashley
Excellent synopsis of what earnest money is and is supposed to be Sandi. This is the way it is supposed to work in Chico and here in Dothan.
I am sure you are as thorough with the entire real estate contract as you are with the earnest money discussion. Chico home buyers and sellers are lucky to have an agent that is on top of everything.
Sandi - Glad to see you are posting on this topic also for your Chico real estate clients. I recently posted about this same topic because I was always taking for granted that my buyers understood the good faith money concept. Boy was I wrong. I’m glad to have a forum to post my information, and glad to see you are helping educate your Chico real estate buyers also. Thanks - Karl
Sandi - Very informative post about the earnest deposit. I was recently reminded buyers do not always know and education is important. Educated buyers make good decisions. I’m sure Chico home buyers appreciate your knowledge and ability to explain the details.
Very informative…and well explained. Similiar to what we do here in Maryland. The selling broker usually holds escrow here and the title company accounts for it on the HUD1.
Sandi - this is helpful information especially if Chico homebuyers haven’t bought a home in recent history.