New Construction and Earnest Money

New Construction and Earnest Money

Let’s take just a moment and define earnest money. Earnest money is a specific form of security deposit used to demonstrate an earnest good faith about wanting to complete a transaction; in this case real estate. Whether you’re doing new construction or resale earnest money will always be required. Sometimes the earnest money is refundable, sometimes it’s not, sometimes a small amount, and other times it’s a large amount.

When is earnest money required?

With all real estate transactions, the earnest money will be required. Typically it’s 1-2% of the purchase price of the house. If it’s a $250,000 home the earnest money is around $2500-5000. If it’s a $3,000,000 dollar home it’s closer to $30,000. New construction is no different in the fact they want 1-2%of the purchase price up front when you sign the contract.

The 1-2% rule, however, does not always hold true. Development south of C470 is quickly coming to an end which means the amount of land left for purchase for new construction is very limited. Areas around Lone Tree and Castle Pines North are coveted as some of the best places to live in all of the Denver Metro areas. Builders are asking for 4% of the purchase price as earnest money and buyers are paying it. The leverage is on the builder’s side when there is so few developments left.

Multiple payments.

The good news is the full amount of the earnest money can be split into multiple payments. This, of course, depends on the builder and the same goes for 1-2% rule. I negotiated earnest money on a new build where $2,500 would be up front when we signed the purchase agreement and the other $2,500 would be due after selection in the home gallery were chosen.

Can we get our earnest money back?

The biggest question buyers have when purchasing a new construction home is, “can we get our earnest money back?” The typical answer is yes but with fewer options than a resale property. Earnest money can be held contingent upon the sale of their current home, buyers choosing a specific lot, choosing an elevation or floor plan on a specific lot, permits, deadlines such as framing, and if your loan falls through.

The second answer to that question is no. While these are typical ways in which a buyer can receive their earnest money if they choose to walk away from the home it doesn’t mean they are guaranteed. Builders can ask for the earnest money to be hard or nonrefundable. When earnest money comes up in the negotiating of the contract all available options for receiving the earnest money, if you wish to walk away, should be discussed before you sign the purchase contract.

With so little properties for sale on the resale market, many buyers are looking at new construction or their dream home. Remember to always have an agent represent you while entertaining these options. The sales people represent the builders and not you. Have your Realtor negotiate the terms of the earnest money as best we can before putting down money you may not get back.

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