Earnest Money in the Philippines Defined
Usually, when a buyer sees a property they like, many a seasoned broker will say to give an earnest money to hold the property. Is this wise or not?
What is Earnest Money ?
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 IS THE CORRECT AMOUNT?
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.
THINGS TO NOTE ABOUT EARNEST MONEY
While giving an earnest money is important, it is also equally important to ensure that the proper wordings are written in the Letter of Intent that comes alongside the earnest money. This should be written properly as this shows the timings and documents needed to move forward with a deal that is beneficial to both parties.
EARNEST MONEY OR CONTRACT TO SELL (CTS)?
I have also encountered deals wherein a simple earnest money agreement is done in lieu of a contract to sell (CTS), 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. A CTS is, most of the time, notarized and more binding.
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.
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