Understanding Real Estate Sales Contracts in Washington, DC [Part 2 – Earnest Money Deposit]

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GCAAR Sales Contract – Pg 2 EMD

When purchasing a home, there will be several points at which you will be writing checks, wiring money, and paying for other expenses with a credit card. The first check will be written before you even have a contract accepted by a seller since it is customary to include a picture or photocopy or what’s called the Earnest Money Deposit check at the time of contract offer. While you will send a copy of the check with your offer proposal, it won’t actually be submitted and cashed until you have a fully executed contract in hand.

Who am I writing the EMD check to?

The earnest money deposit (of EMD) is written out to the settlement company (title company) you choose to work with. Among other vendors, the choice of title company to facilitate the transaction is that of the buyer. That doesn’t mean that your agent may not encourage you to select the seller’s preferred title company (and most of the time, seller here really means seller’s agent) in a competitive situation to help you gain an edge, but it’s ultimately the buyer’s choice. The amount of time you have to submit this deposit is stipulated in each contract but it is typically 3-5 days following contract ratification.

How much is a typical EMD in Washington, DC?

The amount of the deposit you are required to pay is part of the negotiation process but the buyer will propose an amount in the general sales contract used most often by agents in Washington, DC. A customary deposit amount is 5% of the sales contract. In situations in which the buyer is only securing 5% financing, I have seen deposits as low as 2% of the contract sales price. In competitive situations and if possible, it’s advised to increase the deposit to as much as 10% of the contract sales price. This would indicate to the seller that you are especially confident in your ability to close the transaction and may be a way to increase the competitiveness of your contract without paying more money overall.

What happens to my Earnest Money Deposit if I choose to cancel my contract before settlement?

It depends. The hope is that you are cancelling under a previously agreed upon contingency included in the contract. This could include the home inspection contingency, conventional financing, or condominium document review. An overview of those contingencies in future posts.

There are 2 types of contingencies you can include in your contract. Those that will allow you the opportunity to unilaterally cancel the contract without seller approval and those that require verification and/or seller agreement to release the contract. Even if a contract carried no contingencies at all (rare and not advised), certain transactions will have mandatory review periods where you are able to cancel the contract within a certain time frame with no penalty and full refund of your EMD without seller approval. This includes sales of condominiums, cooperative units, and new construction units.

Other contingencies such as financing require proof that you were not able to secure financing. This would come in the form of a written rejection letter from your lender and has to be issued to the seller within the contingency time-frame, typically 18-21 days from contract ratification. It is up to your lender to determine whether or not they will be able to supply you with a rejection notice to be able to use.

If all else fails and you are cancelling outside of the contingencies available to you as a buyer in that particular transaction, the seller could choose to release you from the contract and at that time, release of the EMD would be negotiated.

The title company, while often headed by attorneys, does not represent you in the transaction but merely facilitates it. If there is a dispute over whether or not the transaction still stands, they are obligated to disburse the EMD in a manner consistent with the provisions of the contract and all applicable local laws.

What happens to the EMD when we close?

The vast majority of the time, if your agent helps you craft a contract that affords you as a buyer sufficient protection against losing your EMD, you will either be able to cancel without issue if something does go wrong or you will successfully be able to close your home purchase. In this case, the EMD is simply credited against the amount of cash you are required as the buyer to bring to settle on your new home.

For more information on any of how to craft a competitive offer for the purchase of a new home or more about the buying process, contact me at [email protected] or at 202-378-0567.

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