When you start the process of buying a home or any type of real estate, you’ll no doubt hear the term “earnest money deposit” (EMD). So what exactly is an EMD?

An EMD becomes relevant when you are ready to make an offer on a property. In most states, your Real Estate Agent prepares the offer on your behalf. The offer usually takes the form of a written contract that is submitted to the seller by way of their agent.

In addition to the offer document, sellers typically expect an EMD. An EMD is a monetary deposit submitted via check to demonstrate to the seller that you are a serious buyer. In some regions of the country, only a photocopy of the check is submitted with the offer, and the original check is delivered to the appropriate entity if the offer is accepted. Ask your Real Estate Agent to clarify how deposits are handled in your region of the country.

The check is usually made out to an independent third- party such as a Title Company, Escrow Company, Real Estate Attorney or your Real Estate Broker. Ask your Real Estate Agent to clarify who will hold the EMD.

The amount of the EMD sellers expect varies by region. The EMD amount is based on the customs and practices for a region, but is generally from 1% to 2% of the purchase price. In a competitive market place where demand exceeds the supply of homes, some buyers may offer a higher EMD than expected to impress the seller of their intent. In determining the amount of your EMD, consult your Real Estate Agent and balance the need to demonstrate your serious intent, against the good business practice of minimizing the deposit amount.

The amount of the EMD is usually applied to reduce the purchase price of the property or to cover closing costs, as you dictate. For example, if you are purchasing a $300,000 property and you give an EMD of $3000, then the remaining balance owned at closing is $297,000 (plus closing costs). Alternatively, you may direct that the EMD be applied toward the closing costs.

Once a valid contract for purchase is created, an independent third-party usually holds the EMD until the purchase is either completed or cancelled. At this point, the money belongs jointly to both the seller and the buyer.

In cases where you make an offer that is accepted but later decide to cancel the offer, the terms specified in the contract (or state law) will dictate if, and under what circumstances, the EMD is returned to you. Be aware that you could loose your deposit if you do not not comply with the terms of your contract. Your Real Estate Agent can provide you information about how EMDs are dealt with if a contract is cancelled.

Since state law varies by region and practices can differ even within the same state, be sure to consult your Real Estate agent about the rules that apply to EMDs in your region of the country. You should also be aware that the EMD is not related to any down payment that you make toward your home loan.

There are a number of ways that individuals can obtain their dream home without necessarily going the traditional route to secure financing. Rent to own and lease purchase options are two popular ways to do this.

Rent-to-Own Homes

Rent-to-own homes or lease purchase options have become a great source of income for the real estate investor and a lifesaver for those who would otherwise not be able to purchase a home.

You can compare this real estate strategy of lease purchase options to leasing an automobile where you put a down payment down, you lease it for a pre-determined amount of time, and then you purchase it at the end of the lease.

Benefits to real estate investors:

* They are receiving a residual income.
* They are assisting others obtain a goal that otherwise would not be possible.
* Their investment is secured by a non-refundable deposit, which the buyer forfeits if the deal does not go through.

Benefits to the buyers:

* They can move into the home before they actually purchase it.
* Many times, their deposit will be applied to the purchase of the home.
* They have a chance to improve their credit rating while leasing the home.
* They have a chance to save for the down payment while leasing the home.

How Lease Purchasing Works

* Normally, this rent-to-own or lease purchase agreement requires a non-refundable deposit, which is the “option payment.”
* The length of the lease is set 12-24 months, or whatever is agreed upon.
* There is a contract signed, which states the buyer agrees to make monthly payments to the seller. This monthly payment is normally higher than what the home would normally rent for. In some cases, a percentage of the payments may be applied to the purchase of the home.
* At the end of the lease, the buyer has the option to finance the remainder of the balance owed, sometimes referred to as a “balloon payment,” and purchase the property. Or they can move, forfeit their deposit, and have no further obligations to the seller.

Lease purchase or rent-to-own options are an excellent way for a real estate investor to make money because they have multiple sources of income from this one property. They receive the option deposit; they receive monthly payments; and at the end of the term of the agreement, they will either walk away with the proceeds from the sale or the forfeited deposit. Either way, it’s a win/win situation for the real estate investor.

Adam is active in various social and community programs aimed at providing equal opportunity to education,health,jobs and business opportunities to all regardless of where they are from. Adam has over 10 years experience in managing a successful multi-million dollar advertising and publishing company.