What is an EMD? This is a question that gets asked a lot by prospective buyers, and in some cases, by sellers.
Ryan Haley, broker and owner of Atlantic Shores Sotheby’s International Realty, explains the importance of EMD in a real estate contract.
EMD refers to “earnest money deposit.” EMD is more of a mortgage loan officer term, but depending on who you’re talking to and what part of the country you are in, the term is often used in real estate contract discussions. It is also sometimes called a “good faith deposit.”
The EMD simply refers to the initial check and/or monies that accompany your offer to purchase a property.
After the offer is accepted, that good faith deposit money or EMD is put into a non-interest-bearing escrow account.
What Is the Purpose of an EMD?
When you’re making an offer, the higher the EMD that accompanies the offer, the higher the chances of the seller to look at that offer. This gives the impression that the seller is serious about moving forward with their contract and that they are going to act in good faith to reach a settlement.
How Much Should the EMD Be?
Before the real estate market here has changed over the last year and a half, it was very common to have 1% of the purchase price as EMD. But this number can be higher.
What Happens to the EMD?
The good faith deposit goes to an escrow account and will stay there until one of these three scenarios happen:
- The buyer exercises their right to cancel the contract under one of the contingencies in the contract; or
- The buyer goes to settlement and the EMD is credited against the total amount needed for the closing. For example, if you need to bring $100,000 to close the transaction and you have $10,000 EMD, you will only need to bring $90,000;
- The third way the EMD can be dispersed is if a court interpleader decides which party the EMD should go to.
EMD is a common and simple term, but it can get complicated because there is not an exact figure. Also, depending on how you act and react in the contract, the EMD is going to help you and get you to settlement, or it could hurt you because your deposit could be at risk if you do not act in the contract in good faith.
If you need more information about EMD and the implications of either a high or a low good-faith deposit, please do give us a call, and we’ll be happy to discuss it with you.