Guide to Earnest Money in Oklahoma Real Estate Transactions
Oklahoma real estate transactions, both residential and commercial, generally conform to certain standards when it comes to the amount, placement, and use of earnest money. Here is a quick guide for what we typically see:
What is earnest money?
Earnest money is a term for the initial dollars which are paid towards the purchase of a property as a show of good faith and to prove that the buyer intends to move forward with a transaction. Earnest funds are typically paid to a neutral third party in a transaction, such as an attorney, real estate agent, or title company. Earnest money is usually applied to the purchase price at closing, or can be refunded to one of the parties to the transaction if closing never occurs.
Earnest money is not required. However, most sellers will insist on at least a minimal amount of earnest money for their protection.
For established residential properties (not a vacant lot, and not a new home build), a de minimis amount of $500 or $1,000 is often used for parties that are familiar with each other.
If parties are not personal acquaintances, which is the vast majority of transactions, the general practice is to use anywhere from 1 – 3% of the total purchase price; 1% is an extremely common earnest money amount in Oklahoma residential transactions.
In new construction homes, builders often seek anywhere from 5 – 10% of the total purchase price as earnest money.
Earnest money is much more substantial in commercial real estate (CRE) transactions. In the commercial transaction context, earnest money must be a significant amount in order to demonstrate the seriousness of the buyer’s intention to purchase the target property.
The earnest money effectively functions as security for the buyer’s potential breach or any defaults under the PSA, including an untimely or late termination of the PSA without cause.
Earnest Money Strategies
The transacting parties are naturally opposed. The buyer wants to offer the least amount possible, but too little shows that the buyer does not intend to close the transaction or prefers to have little invested in the deal. Meanwhile, the seller will typically want the most amount of earnest money possible to increase their security, or their negotiated and predetermined damages in the event of a termination.
Where Is Earnest Money Held Before Closing
A neutral third party, i.e. someone who is not a party to the transaction, typically holds the earnest money. This would include escrow agents, title companies, or attorneys.
These neutral parties should provide a receipt upon acceptance of the funds. Additionally, the parties should supply the earnest money holder with a copy of their written agreement, which should provide for when and how the holder may disburse the funds. Earnest money will be applied to the payment of the purchase price at closing, or must be given to one of the parties in the event that closing does not occur.
Who Receives Earnest Money When Transaction is Terminated
The party who is due the earnest money in the event of termination depends on a number of factors, including which party terminated the deal first, whether they had a right to terminate, and more. To determine whether you have the right to terminate an agreement, see our article on PSA termination.
Contact Avenue Legal Group for help with your commercial or residential transaction, or for help navigating earnest money disputes.
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