What is an earnest money contract and what is it for?
August 11, 2022
What is an earnest money contract?
The earnest money contract is an agreement signed by the seller and the buyer to formalize the reservation contract for a property. A sum of money, usually between 5% and 15% of the value of the property, is paid as a pre-agreement and its validity and validity, the latter agreed in advance, is put in writing.
The buyer reserves the right to purchase and the seller undertakes to deliver the property.
Types of earnest money contracts:
- Penitential deposit contract: these are an exception. An agreed amount of money is given to finish the contract. If the buyer backs out, he loses the money previously paid (called “arras”). On the other hand, if the seller does not go ahead with the sale, he will have to pay the buyer double the amount paid. It is important to specify this type of earnest money, as it can be confused with confirmatory earnest money.
- Guarantee or confirmatory earnest money contract: its purpose is to oblige the parties to fulfil the contract. Both parties confirm the contract and commit themselves to the sale.
- Penal deposit contract: this is made to secure the purchase. If either party fails to perform, they will have to pay damages. In addition, the party who follows the contract can choose between: renouncing the contract and settling for the compensation, or forcing the other party to finalize the sale and purchase, while keeping the compensation.
What must be included in a deposit contract?
- Personal details of both parties
- Description and information about the property (address, characteristics, extras, cadastral reference number, certificate of occupancy, etc.).
- Selling price and method of payment
- Amount of money to be paid in advance (this is deducted from the total amount to be paid).
- Penalty in case of non-fulfilment of the contract.
- Purchase and sale costs and who will be responsible for them
- Deadline for formalizing the contract