The very first check you’ll write to a home builder is for the earnest money for the home you’ll eventually purchase. There may be many different definitions floating around for this term, so, to start off, we’ll use the one in” The First Time Home Buyer’s Survival Guide to New Homes.” Earnest money is money that the home buyer pays the builder to confirm the contract and ensures that the builder will no longer show the inventory home or a particular home site to other shoppers. Most builders require earnest money from the shopper before they’ll take a home off the market, begin construction on a new home, or, in some cases, even consider a buyer’s offer. Earnest money amounts are negotiable and can range from a few hundred dollars to several thousand depending on the home and builder. Giving the builder earnest money is an important first step in the new home purchase process. It sends a strong signal to the builder that you are serious about the purchase of a new home and, given the right circumstances, will move ahead and purchase this home.
Builders approach earnest money in different ways. During special promotions, a builder may offer shoppers the right to reserve a home or home site for as little as three hundred dollars. However, these instances are pretty rare. As a general rule, builders will require three to five thousand dollars to hold the home or home site and begin negotiations on the contract. One good thing is that the amount of earnest money that a builder will accept is completely up to the builder and, therefore, is negotiable, but chances are that you’ll need to write an earnest money check the first time you submit an offer. The general rule is that if a home shopper is not willing to write a check when they submit the contract, they are not very serious about the purchase. The builder will have some “skin in the game” if they spend time negotiating the contract or even if they take the home off the market for several days (and eliminate any chance that they’ll be able to sell the home during that time.) They often require that the home shopper share some of that risk.
There are a few factors that can affect how a builder approaches earnest money and each may impact your ability to negotiate. The first is whether or not the house you’re planning on buying is a spec home, or one that is already built and ready to sell. Another is if you’re looking at a home site on which you’d like to build your new home. A builder may require more earnest money to take an inventory home off the market than they’ll require to put a hold on a home site. Second, the location of a home site may factor into the builder’s decision. If you’re asking the builder to put a hold on the last lakeview lot, one by a green space or near the amenity center, they may require a higher amount than if you were requesting that they put a hold on a site in the middle of a street. The economic conditions will also factor into a builder’s decision. If you’re buying a home in a buyer’s market (high supply, low demand), then you’ll have more negotiating power than if you’re buying a home in a seller’s market (high demand, low supply.)
The nearby competition will also factor into the builder’s attitude. If there is a successful community just down the street that the builder is losing sales to, they may be more willing to work with you on the amount of your earnest money.
In some cases, if you do not go thought with the purchase of the home, the builder will be entitled to keep your earnest money. So, if you’re not serious about following through with the purchase on the home, it’s best not to submit an earnest money check with your offer to the builder. This isn’t always a bad idea, and, depending on the situation or salesman, you may be able to do a lot of negotiating on the price and upgrades in your new home before submitting an official offer or a check. Remember, salespeople only get paid with they sell a house, so they’ll do all they can to convince their sales manager to accept a deal or consider what you want. Eventually, most sales managers will cut off these negotiations and tell the salesperson to get the shopper to commit- but you can get a lot done before that point! If the policy of the builder is to keep any earnest money on deals that do not go through, this information will be clearly stated in the contract that you’ll submit to the builder. Ask the builder about their earnest money return policy and make sure you’re comfortable with the policy. If the builder agrees to return your earnest money even if you don’t buy the house, write that into the contract.
This is often done by taking a pen and crossing out the language about returning the earnest money and replacing it with a phrase similar to “The builder will return 100% of the earnest money if the buyer does not complete the sale for any reason.” Make sure that both you and the sales representative initial the modification before you sign the contract. In some cases, the sales representative cannot make this decision, and you’ll need the sales manager to sign off on this. Always get this in writing before you proceed.
Finally, your earnest money check can only be cashed by the builder if they accept your offer. A builder cannot keep the check and then counter your offer with one of their own. If your offer is not acceptable to the builder then they will return the earnest money check. In most cases, the check will not be deposited until the builder informs you that they’ll accept your offer. Once the builder accepts, they’ll cash the check and apply your earnest money to the price of the home.
If you’ve found the perfect house, have decided on all the upgrades that you’d like, and have arrived at a price that works, it’s time to submit a contract. While the moment you write the earnest money check can make you a little anxious, once the ink is dry you’ll stop thinking about the money and you’ll begin to think about how excited you feel about finally finding the perfect home.