David Fialk, REALTOR... All Real Estate Talk

Terms of the Contract Offer

Initial Deposit

Be prepared to write a deposit check when making a contract offer to purchase real estate. Commonly referred to as a Binder, more commonly known as the initial deposit, this is the check made out to the Selling Real Estate Office when submitting a contract offer. In simple terms, it is a good faith deposit to express interest in purchasing real estate.

What is the required amount of a binder deposit? There is no law as to a required amount, but local real estate practices may determine what is acceptable. Common sense should prevail in determining the amount of the Binder deposit however. Writing a check for $100.00 shows good faith, but what kind of statement is that making to the owner when the contract offer is presented to them?

Would a more substantial initial deposit, say $1,000.00, make a stronger statement? How about $5,000 as an initial deposit, or even more? Wouldn't a larger initial deposit check make a stronger impression with a seller in making a decision to accept a contract offer or in contract negotiations? 

The Binder is generally not deposited by the Real Estate Broker until there is offer and acceptance, a signed contract of sale. However, there are State Real Estate Licensing Laws which regulate how long a Real Estate Broker can hold a deposit check without depositing it into the Company's Trust Account. In cases where contract negotiations are prolonged, perhaps beyond five business days, most Real Estate Brokers will either deposit the check into their Trust Account during contract negotiations, or ask the buyer to write a new check as contract negotiations continue.

If the contract offer is not accepted, the Binder is returned to the buyer. If the contract is accepted and signed by the owner, the Binder will be deposited in the Broker's Trust Account and will be applied to the buyer's down payment and the purchase price.

Earnest Money Deposit

Commonly referred to as the second deposit, this is the additional upfront deposit made in the purchase of real estate and is also part of the buyer's total down payment. The earnest money deposit could be 10% of the purchase price depending on the real estate market the home is being purchased in, the price range or the total amount of the down payment being used by the buyer.

It is quite common in many real estate markets that homes are purchased where the total down payment is less than 10% of the purchase price. In these type real estate transactions, the earnest money deposit will generally be some portion of the total down payment, or perhaps the entire amount of the down payment in a transaction where the buyer has a total down total payment of 3.5 % to purchase a home. The amount of earnest money deposit is something that may eventually be determined during contract negotiations.

The earnest money deposit is generally paid within a certain time frame or after completion of Attorney Review. It is generally paid to the Selling Broker, unless local real estate practices provide otherwise, or there is a change made to the contract of sale during the Attorney Review process where the Seller's Attorney requests to hold all deposit monies in their Trust Account.

There are times when a contract of sale is terminated after Attorney Review, such as home inspection problems, mortgage denial and others. In those situations where a contract to purchase is cancelled in accordance with the terms of the contract, all deposit monies previously paid by the buyer are refunded.

Many buyers, and buyer agents, under estimate the importance of these two aspects of contract preparation, and the benefits they can provide in contract negotiation. The Initial Deposit and Earnest Deposit can be the difference in whether a contract offer gets accepted and signed by the seller, especially in multi-contract presentations.

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