If you want to buy property in Texas, you should know about Texas earnest money. It’s the money you give to the property seller as a gesture of good faith in order to proceed with the purchase agreement. It typically gets paid before you make the agreed down payment on the property.
How much do you have to pay for earnest money in Texas? Generally, several factors determine the earnest money deposit in each purchase situation. We discuss some of them extensively in the following paragraphs.
Customary Earnest Money in Texas
Earnest money discussions typically come before the purchase order begins. It’s to let the seller know you’re prepared to follow through with buying the property.
How much earnest money do you have to pay in Texas? According to current Texas market standards, an earnest money deposit should be about one percent of the purchase price. However, the seller is often to open negotiations on how much you should pay.
Typically, you pay Texas earnest money to a Title company as a check or wire transfer. The title company acts as the escrow agent, pending your purchase offer’s acceptance. It’s essential to check with your real estate company at this point to see which payment method works better for your circumstances.
Conditions for Reclaiming Earnest Money
Texas earnest money generally stays with an escrow agent for a while. As a rule of thumb, an earnest money deposit only gets sent to the seller when they accept your purchase offer. Otherwise, the money gets paid back to you from the trust or escrow account.
Beyond knowing how much earnest money is required in Texas, you may wish to pull out of the deal. In this case you could apply to get your earnest money check sent back to you. However, it has to be on the condition that the seller is yet to accept your purchase offer. When all of the conditions are met, money from an escrow account will be made available to purchase your new home together with closing costs.
Under the TREC (Texas Real Estate Contract) format, various clauses exist in purchase contracts to protect the buyer’s earnest money deposits in real estate transactions. This document dictates how much earnest money you can reclaim. Sometimes, the seller can claim the funds entirely if you default. Also, you’re only eligible for a partial wire transfer refund if there are invoiced services you have to pay for.
Before paying out the earnest money, buyers have time to think about their purchase. It’s called an option period and generally lasts between five and fifteen days. Enough time for a home inspection. To secure it, you can pay a token fee with your deposit.
Throughout your option period, you can pull out of the deal for any reason. It might be an issue with the home inspection or the financing. However, it bears mentioning that a real estate attorney needs to be present to properly guide you.
Does Earnest Money Value Change?
While we’ve established that earnest money could be about 1% of the total proposed purchase price, it’s not fixed. Therefore, no one can conveniently answer down to the dollar.
Earnest money value fluctuates depending on the current market trends. For instance, when there’s a shortage in property listings in the area, the real estate market goes into a state called a “seller’s market.” That’s when many buyers have to compete for the few properties available for sale.
If you’re in a seller’s market, earnest money becomes a function of the “highest bidder” – the potential buyers who are willing to pay the most. Generally, real estate brokerage firms can help you out with the best bargaining strategies to use.
Sellers consider the highest earnest money as showing the most financial commitment to buying the property. It could be $5,000 or $50,000. Either way, this amount shows just how serious you are about buying your dream home!
Contract Sample for a Texas Property Purchase
Conditions for earnest money don’t exist separately. Instead, they’re a part of the binding contract, containing other essential purchase clauses. Below is a sample of a family residential contract, detailing the language you can expect when preparing to buy a Texas Property.
TITLE AND SURVEY:
“Within 20 days after the Title Company receives a copy of this contract, Seller shall furnish to Buyer a commitment for title insurance (“Commitment”) and, at Buyer’s expense, legible copies of restrictive covenants and documents evidencing exceptions in the Commitment (Exception Documents) other than the standard printed exceptions. Seller authorizes the Title Company to deliver the Commitment and Exception Documents to Buyer at Buyer’s address shown in Paragraph 21. If the Commitment and Exception Documents don’t get delivered to Buyer within the specified time, the time for delivery will get extended automatically to 15 days or the Closing Period, whichever is earlier. If due to factors beyond the Seller’s control, the Commitment and Exception Documents don’t get delivered within the time required, Buyer may terminate this contract and have the Earnest Money refunded.”
“Buyer may object in writing to defects, exceptions, or encumbrances to title: disclosed on the survey or other items 6A(1) through (7) above; disclosed in the Commitment, Exception Documents other than items 6A(1) through (8) above; or which prohibit the following use or activity: [blank space available to add services or activities].
Buyer must object by the earlier of (i) the Closing Date or (ii)_______ days after Buyer receives the Commitment, Exception Documents, and the survey. Buyer’s failure to object within the time allowed will constitute a waiver of Buyer’s right to object, except that Buyer does not waive the requirements in Schedule C of the Commitment. Provided Seller is not obligated to incur any expense, Seller shall cure the timely objections of Buyer or any third party lender within 15 days after Seller receives the complaints, and the Closing Date gets extended as necessary. If objections don’t get resolved within such 15 days, this contract will terminate, and the Buyer receives the Earnest Money unless they waive the objections.”
LENDER REQUIRED REPAIRS AND TREATMENTS:
“Unless otherwise agreed in writing, neither party is obligated to pay for lender required repairs, which includes treatment for wood-destroying insects. If the parties do not agree to pay for the lender-required repairs or treatments, this contract will terminate, and the Buyer receives the earnest money refund. If the cost of the lender required repairs and treatments exceeds 5% of the Sales Price, Buyer may terminate this contract, and the Buyer gets an earnest money refund.”
COMPLETION OF REPAIRS AND TREATMENTS:
“Unless otherwise agreed in writing, Seller shall complete all agreed repairs and treatments before the Closing Date. All required permits must be in place, and repairs and treatments are done by licensed or otherwise authorized by law to provide such repairs or treatments. At Buyer’s election, any transferable warranties received by Seller concerning the repairs and treatments will get transferred to Buyer at Buyer’s expense. If Seller fails to complete any agreed repairs and treatments before the Closing Date, Buyer may exercise remedies under Paragraph 15 or extend the Closing Date up to 15 days if necessary for Seller to complete the repairs and treatments.”
“The closing of the sale will be on or before _____________________, _________, or within seven days after objections made under Paragraph 6D have been cured or waived, whichever date is later (Closing Date). If either party fails to close the sale by the Closing Date, the non-defaulting party may exercise the remedies contained in Paragraph 15.”
- CASUALTY LOSS:
“If any part of the Property is damaged or destroyed by fire or other casualties after the effective date of this contract, Seller shall restore the property to its previous condition as soon as reasonably possible, but in any event by the Closing Date. If Seller fails to do so due to factors beyond Seller’s control, Buyer may (a) terminate this contract and the Earnest Money will be refunded to Buyer (b) extend the time for performance up to 15 days, and the Closing Date get extended as necessary or (c) accept the Property in its damaged condition with an assignment of insurance proceeds and receive credit from Seller at closing in the amount of the deductible under the insurance policy. Seller’s obligations under this paragraph are independent of any other obligations of Seller under this contract.”
“If Buyer fails to comply with this contract, Buyer will be in default, and Seller may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b) terminate this contract and receive the Earnest Money as liquidated damages, thereby releasing both parties from this contract. If Seller fails to comply with this contract, Seller will be in default, and Buyer may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b) terminate this contract and receive the Earnest Money, thereby releasing both parties from this contract.”
Earnest Money is a small but significant part of your purchase if you plan to get a property in Texas. While the convention is to pay a certain percentage of the total proposed price, the seller and market trends determine how much earnest money should be.
The above tips explain how much is earnest money in Texas, and how such deposits work in the current Texas real estate market. It also informs you how to reclaim earnest money when the deal falls through. A seasoned real estate service could ensure that you harmonize these details in your purchase contract and get the best value for you as a buyer.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.