The question would remain then, "What good is it?"
The simplest explanation of an Earnest Money Deposit can be deduced from its namesake.
"How willing are you to purchase the home?" When you enter into a contract involving Real Estate, we are usually talking about a rather large transaction to just enter into lightly.
It may help to put yourself in the seller's shoes. A contract could take up to as long as 1.5 months to close. Now, let's say on the 44th day you were the seller in this case and the buyer looks you in eye and says, "Well thanks for taking your home off the market for 44 entire days while you were not able to accept anyone elses offer as we had an executed contract, but no big deal on my side since I really had no interest and I really wasn't very "Earnest" in my offer as I presented your with $0. How many times would you allow that situation to play out and how many times would you want to go to court and try to sue for damages and performance before you decided there had to be a better way? Well luckily there is - Enter the Earnest Money Deposit & the Option Fee. In such a situation as above, the Earnest Money would now play a pretty big factor in at least helping you recover 44 days that you were unable to market your home.
The Option Fee, on the other hand, is an entirely different animal. The Option Fee is your buffer to walk away just as the buyer in our previous example had done, but the time in which you have to do so is much shorter but your loss is so much less. The advantage to both parties is if you do find a reason (or no reason at all as is the right you have from the "unrestricted" right) to terminate the contract you lose possibly the cost of an inspection and the small Option Fee, but your Earnest Money is not lost. On the other hand, during the Option Period, the seller is still free to keep the house open for potential buyers and the $50-$100 that they receive is usually enough to keep everyone from returning to the dark ages and clubbing one another to death.Take the 1,3,5,7,10 days or whatever you may choose and put up the $50-$100 for your peace of mind and the needed time to make sure your inspections are completed, you get a WDI report, you are happy with the terms of your loan and most importantly have your agent negotiate final repairs, pricing and whatever else it is that you may find is something that needs negotiating. If you find that there is no middle ground you can reach with the other party, you can then walk away and if you have followed the terms of the Termination Option & your agent's instructions, your agent will hand you a Release of Earnest Money Form that brings every cent back into your pocket. It's a small price to pay the Option Fee when it in so many ways provides you the utmost protection against buying a castle sitting in the middle of quick sand.
Guy E. Gimenez ABR, CRS, GRI
Broker / Investor
The PowerHouse Group