What is an Earnest Money Contract?
June 27, 2024
To the question: what is an earnest money contract, from Espígul we want to clarify that it is an agreement signed by the seller and buyer to formalize the reservation contract for a home. An amount of money is paid, which usually ranges between 5% and 15% of the value of the property, as a pre-agreement, and its validity and term are left in writing, the latter agreed in advance.
Through this operation, the buyer reserves the right to purchase and the seller agrees to deliver the property.
Types of Earnest Money Contracts
Below we detail and show the different types of earnest money contracts:
Withdrawal Earnest Money Contract
The withdrawal earnest money contract is an exception. An agreed amount of money is delivered to terminate the contract. If the buyer backs out, they lose the money previously paid (called “arras”). However, if the seller is the one who does not continue with the sale, they will have to pay the buyer twice what they paid.
Guarantee or Confirmatory Earnest Money Contract
The confirmatory earnest money contract is intended to obligate the parties to comply with the contract. Both parties confirm the contract and commit to the sale.
Penalty Earnest Money Contract
The penalty earnest money contract is made to ensure the purchase. If either party fails to comply, they will have to pay compensation for damages. In addition, the party that follows the contract may choose between: renouncing the contract and settling for compensation, or forcing the other party to finalize the sale, while keeping the compensation.
What Must be Stated in an Earnest Money Contract?
For an optimal execution of the earnest money contract, it is essential to state:
- Personal data of both parties.
- Description and information of the property (address, characteristics, extras, cadastral reference number, certificate of occupancy…).
- Sale price and method of payment.
- Amount of money paid in advance (deducted from the total to be paid).
- The penalty in case of breach of contract.
- Sale expenses and who will be responsible.
- Deadline to formalize the contract.
Who Makes the Earnest Money Contract
If you do not know who makes the earnest money contract, you should know that it is prepared by both the buyer and the seller of the property. Both must agree on the terms and conditions thereof. Generally, the assistance of a lawyer or a real estate agent is used to ensure that everything is done in accordance with the law and that there are no confusions or misunderstandings between the parties.
How much Does an Earnest Money Contract Cost
Knowing how much an earnest money contract costs is complicated, because it can vary considerably depending on the case. Normally, a percentage of the total price of the property is established, which usually ranges between 5% and 10%. In addition, possible additional expenses for the drafting and formalization of the contract must be taken into account, which may include legal fees and intermediary commissions.
What Happens if the Earnest Money Contract Expires
If the earnest money contract expires and the sale of the property has not been carried out, the consequences depend on what has been agreed in the contract. Generally, if the buyer does not comply with their part, they lose the money delivered as earnest money. On the other hand, if it is the seller who fails to comply, they must return twice the amount received. Each situation is unique and it is recommended to seek adequate advice to know all the implications.
Espígul in Advising your Earnest Money Contract
As we have been commenting throughout the post, it is very important to have good advice and the presence of a real estate agent in each step, to avoid misunderstandings. Therefore, we want to help you in everything you need and accompany you throughout the process.
Likewise, we recommend you visit the Espígul website to find the homes that best suit your needs. Do not hesitate to contact us if you have any questions or need advice. We will be happy to help you!
In addition, if you are considering buying a home, we recommend you consult our post on housing purchase aid.
