What is Earnest Money ?
Here are some definitions :
Earnest Money is a sum of money paid by a buyer at the time of entering a contract to indicate interest and ability of the buyer to carry out the contract. Normally, earnest money is applied to the purchase price. Often the contract provides for Forfeiture of this sum if the buyer defaults.
An Earnest Money agreement is a real estate transaction that creates a process to help conclude a sale. Once a seller and a buyer sign an earnest money agreement of contract to sell, they are legally bound to sell and purchase the property in question in accordance with the terms set forth in the agreement.
Earnest money agreement terms involve the property in question, the type of deed, price and terms of payment and also designate an earnest money deposit amount to be paid by the buyer to secure the sale.
How much earnest money is involved ? This really depends on both the buyer and seller as there is no fixed amount / percentage that sellers and buyers use. The basis of earnest money also depends on the amount involved in the sale. However, based on our experience, the following terms are followed :
1) 5 – 10% of the sale amount
2) Php 100,000 – Php 1,000,000 upon acceptance of offer
It’s either an amount or percentage of the sale involved.
The purpose of an earnest money is for the buyer to show faith in buying a property. This normally locks up the deal and the property involved until all terms and conditions agreed by both seller and buyer are met.
Since the property is on hold and has been pulled out of the market by the seller after earnest money has been received, a forfeiture clause is added into the contract wherein a portion of the whole amount paid by the buyer is forfeited in case the transaction doesn’t push through. Likewise, should the deal not push through because of the Seller, a penalty will also be charged on a mutually agreed amount in favor of the Buyer. Take note that this is something the forfeiture clause has to be mutually agreed by both parties.
For your information , an associate recently came across a transaction wherein the Buyer failed to pay a Seller on an agreed date and time and somehow, the Buyer was able to stamp a “CONSULTA CLAUSE” in the Title inspite of weak evidence. I believe that it was thru the Land Registration Authority where it was stamped. I am studying this case carefully as this situations shouldn’t happen as there are strict guidelines on having annotations done in a Title. To top things off, the property now can’t be sold due to the “CONSULTA CLAUSE”, i will have a blog on this issue soon, just getting all the facts and information for now.
Finally, I have also encountered deals wherein a simple earnest money agreement is done in lieu of a contract to sell, however, it’s always safer to do a contract to sell. A contract to sell usually spells out the terms and conditions of both parties until a final payment is made wherein a deed of absolute sale is then used.
As always, it’s best to seek legal advise from a lawyer or there are also seasoned brokers that are knowledgeable enough to process this.
Have a great day !
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Robert G. Sarmiento Properties
Professional Affiliation :
Philippine Association of Real Estate Boards
Member, City of Taguig Real Estate Board 2016 – 2017
Real Estate Broker’s Association of the Philippines 2000-2015
President, Greenhills Chapter 2008, 2009
Philippine Association of Real Estate Brokers
San Juan Mandaluyong Chapter 1998, 1999
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