What is earnest money deposit: everything you need to know about earnest money deposits

In many big business transactions or matters like real estate deals, selling and buying of a company, or investing in some grand project, you may have heard the term ‘earnest money deposit’ and wondered that what is earnest money deposit (EMD). Then for all of you, we are covering the topic of earnest money deposit in this article so that you can understand this term and other things related to it. This will not only help you to gain some quality knowledge but also aid you in financial matters of business. So, in order to know what is earnest money deposit, scroll down and learn about this informative topic.

what is earnest money

What is an earnest money deposit?

So basically what is an earnest money deposit? It is a type of security deposit that is used in big deals to manifest that buyer or applicant is serious about the transaction. As the word earnest itself means seriousness so by EMD, the seriousness of the buyer is checked. 

Hence, EMD is a kind of token amount of money that is taken from a buyer in major deals for the demonstration of his/her seriousness. The amount of earnest money deposit is from 1-2% of the total amount of the deal. For instance, if a deal is of 1 crore then EMD will be about 1 to 2 lacs.

What is the earnest money deposit’s role in the realty deal?

Now, what is earnest money deposit’s role in a property transaction? We will explain this thing by example. Suppose ‘S’ is a seller and ‘B’ is a buyer. S wants to sell his/her house for 50 lacs and B confirms that he/she will buy the house by paying 50 lacs. 

So, in this case, EMD of 50,000 to 1 lac will be given by B to S. This money of 50,000 to 1 lac is a kind of token amount and by paying it, B books the house in a way that seller will not sell the house to anyone else. The receipt of the payment of EMD is given to the buyer then.

EMD is different from the advanced amount

It should be noted here that the EMD is different from the advance amount. Earnest money is paid in the first step of the realty deal and advance amount is paid in the second step. The advance money is higher than EMD as it’s about 10% of the sum of the amount of deal or the cost of the realty. 

Suppose, the house of S was of 50 lacs so advance will be about let’s say 5 lacs. Also, while paying the advance, an agreement to sell is signed but in the payment of EMD, no such agreement is signed and only the receipt is taken. Via EMD, the buyer only books the property for purchasing.

What is the earnest money deposit’s role in a business deal?

Coming to what is earnest money deposit’s role in business transactions? We will explain EMD’s role in the business deal by taking an example of a project. For instance, there is a road project worth 50 crores, and four companies namely A, B, C, and D, want to purchase it. So, all four companies will bid in the bidding process. 

what is earnest money

Hence, in order to check the seriousness of all the companies who took part in the bidding process, EMD or bid bond will be taken by the seller from them. As the EMD is 1-2% of the total cost of the project so here the bid bond will be 5 crores. Thus, from all the four companies, an EMD of 5 crores will be taken. 

Later when bid will be opened and suppose company C’s bid was lowest so this company will be awarded the contract. The other three companies, A, B, and D will be given back their EMD in about two to three months.

Company C who has won the award will not get back the bid bond of 5 crores it gave and the process of the project’s deal goes on. The second step, in this case, is to submit the project security that is about 10% of the total project cost. 

Hence, considering our example of the road project, the project security will be of 50 crores but as the bid bond of 5 crores had already been submitted by company C so here that amount will be adjusted and the company C has to pay the project security of 45 crores to do the project.

Who gets the EMD if the deal fails.?

It is an important question that who will get the earnest money if the deal fails to close. The simple answer to this query is that whoever will violate the terms of the contract will lose the money. For instance, if the buyer cancels the deal without any valid reason or change of heart or doesn’t stick to the agreed time frame then EMD goes to the seller. 

However, the buyer gets back the earnest money if he/she found problems in the home while inspection, cannot get a mortgage, the home has title search issues or it appraises below its sale cost.

Talking about time, as per one of the real estate company’s owner, there is a period of 17 days mentioned in the sales contract in which the buyer decides whether he/she wants to close this deal or not. 

If the buyer agrees to seal the deal at the end of the 17th day then things remain cool, however, if the deal fails to close because of any reason on the buyer’s side after that 17 days period then generally, the seller has a right to take the EMD. 

However, if the deal doesn’t get sealed before the end of 17 days period because the buyer found some problems in the house while inspection then generally, the buyer takes the EMD. However, there can be many exceptions in this case.

Thus, by doing comprehensive research, we managed to inform you that what is earnest money deposit via this piece of writing. Also, we tried to apprise you about many different things related to EMD like its role in certain transactions and what happens to this money when a deal fails so that you can have a complete idea of this financial term. Hence, next time, if someone will say ‘earnest money deposit’ you will be knowing that what it means which is really great.

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3 thoughts on “What is earnest money deposit: everything you need to know about earnest money deposits

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  • October 3, 2021 at 5:42 pm
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