When you are buying a home, condo or other real estate you are most likely going to be asked to make a good faith deposit.  The purpose of this deposit is to establish that you are serious and have the financial ability to complete the purchase.  Now, do not confuse a good faith deposit with a down payment. 

How much do you need to deposit?

That amount is all dependent on the agreed sale price of the property.   Deposit amounts vary and can range anywhere from 1 to 3 percent of the sale price, but there is no set requirement. 

The amount of the good faith deposit is dependent upon the agreed sale price of the real estate. Deposits vary and typically can range anywhere from 1 to 3 percent of the sales price but, there is no set requirement. You typically want your deposit to be large enough that your offer is taken seriously, but you don’t want to give so much that you put your buying power at risk. Chances are there will be no problem, but the smaller amount you have tied up and at risk in a deposit, the better.

Who gets the money?

Typically the earnest money deposit should be made to a reputable third party such as a well-known real estate brokerage, legal firm, escrow company or title company.

As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close for whatever reason. Most buyers prefer to have real estate agents or attorneys hold the earnest money deposit as  they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used. To avoid the loss of your deposit, follow these tips.

• Never give an earnest money deposit to the seller.

• Verify that the third party will deposit the funds into a separately maintained trust account.

• Obtain a receipt.

• Ask how the money will be returned if necessary. Do they hold the check until it clears or return it?

Is the money refundable?

Your real estate contract will indicate if your deposit is refundable, so be sure to review this document very carefully. It is advisable that you consult a real estate attorney who can help ensure that your offer is written in a manner that protects your rights to the deposit.  Do your research to get the facts about state law and even local customs on refunds of deposits before your earnest money leaves your hands. Even if your money is refunded, you may not receive the entire amount. Often, third party fees are paid out of earnest money deposits. For example, if an appraisal has been completed on the property then the appraisal fee is going to have to be paid before money can be released to either of the parties. Check the laws in your state  as some states have laws requiring the buyer and the seller to agree on the disbursement of these funds before they are refunded, which can lead to further problems and legal action.

A good faith deposit is a lot like an insurance option for a seller. The escrow process can take 30-60 days, and this can cause the property to already be off the market.  The deposit ideally compensates the seller for this time in the event the buyer is not able to follow through on the purchase of the real estate.  The good faith deposit assures the seller that you are serious about purchasing their home.