This is a tough question and the answer varies from case to case, as the “earnest money” serves several purposes:
- Showing the buyer is serious
- A lever to make the Buyer perform
- A form of liquidated damages to compensate the Seller should the Buyer fail to perform
In the Ann Arbor area, earnest money deposits range from 1% to 4% of the sale price. The deposit is either held by the Buyer’s Realtor or the title company. Interest is not usually paid on the deposit, as the costs of setting up and administrating an interest bearing account usually exceed the interest generated (e.g. $5,000 will earn approximately $20 in interest over a 90 day period). A key point on “earnest money” is unless both parties agree to release the money, the party holding the money will usually decline to disburse. They do not want to be caught in a squabble between Buyer and Seller. Instead, they will usually deposit the money in court and allow the judge to decide who gets the money. WARNING: Both the Ann Arbor Area Board of Realtors sales contract and the Purchase Agreement on this site provide that if a contingency is not removed, the contract becomes voidable – that is, either party can back out without any consequences! So if you do not carefully monitor the removal of contingencies, the Buyer can withdraw and get his/her earnest money back.