In Texas, there are so many opportunities for buying land. You’ll find something for everyone; homeowners searching for a plot to construct their dream house, business owners seeking to expand their agricultural operations, and investors looking to take advantage of the unique options for recreation.
So, you’ve done your homework, visited the area, researched prices, and found the perfect acreage for your needs. Now it’s time to make an offer. That’s where earnest money comes into play. It’s a good-faith offer demonstrating you’re serious about buying.
Earnest money for buying land isn’t any different from the process of purchasing a home. But, there are things to consider with any land purchase and how earnest money fits into it. Here’s what to know.
What’s the Purpose of Earnest Money?
When purchasing a home, buyers include earnest money with an offer to signal the seller they’re serious about closing the deal. In land deals, earnest money serves the same purpose — the deposit demonstrates the buyer’s commitment to the transaction.
Earnest money can also act as insurance, protecting both parties during the transaction. There are a few key benefits to offering earnest money as a buyer, including:
- Reassuring the seller: Earnest money assures the seller that you’re not casually browsing but have a genuine interest in buying the property.
- Leverage in negotiations: Proposing a higher earnest money deposit can make your offer more appealing, especially in competitive markets.
- Creating a binding agreement: While it is a commitment, it’s also flexible. Buyers can get their earnest money back if certain predefined conditions set in the contract aren’t met and may have to forfeit it if they walk away for no good reason.
- Getting more time: The upfront earnest money deposit can also give the buyer more time to secure financing, check the title, run appraisals on the land, and verify zoning restrictions.
Who Holds the Earnest Money?
Any earnest money offer is put into an escrow account, a third-party account owned by a disinterested party (usually a bank, real estate broker, or title company). The funds in escrow are held for safekeeping.
That ensures the seller can’t use the money in the account until all terms of an agreement, in this case, buying land, are met by both parties.
How Much Earnest Money is Enough?
Typically, the amount of earnest money put down for a deal ranges from 1 to 5% of the value of the land or property price. However, these numbers aren’t set in stone and are negotiable between the buyer and the seller. And if the market is hotter or a particular parcel has a higher demand, it’s not uncommon to offer more to stand out.
For example, you may have found the perfect property to expand your timber operations. You offer 5% earnest money instead of the standard 2% in the area to help improve your chances and show the seller how serious you are about the deal.
If you’re unsure how much earnest money to put down, an ag realtor can help. These experts, well-versed in Texas land and property prices, can offer advice on both your approach and guidance on earnest money.
How Does Earnest Money Work with Contingencies?
When a buyer makes an offer on a property and provides earnest money as a sign of intent, the purchase agreement usually defines various contingencies and timelines. These contingencies lay out terms for what happens to the earnest money if the deal falls through, including any timelines or specific reasons for pulling out.
Here are a few examples of common contingencies where a buyer may be able to pull out of the deal and not forfeit earnest money to the seller:
- Financing: This details that the purchase is contingent on the buyer securing financing for the land. If the buyer can’t get a loan or mortgage, they can withdraw and get the earnest money back.
- Inspections: A buyer may ask for time to get land inspections, and if any environmental concerns, poor soil quality, or other related problems pop up, the buyer can cancel the deal.
- Title: If there are liens, disputes, or title defects that the seller can’t resolve within a specified period, the buyer can back out and get their earnest money back.
- Appraisal: The buyer can withdraw from the agreement if the land doesn’t appraise for at least the agreed-upon purchase price.
- Water rights: In areas where water is scarce, having rights to access and use water can be crucial. If the land doesn’t have adequate water rights, the buyer might be able to exit the contract.
Lay out the details for any contingency in the purchase agreement. The buyer and seller should understand the conditions when they’re entitled to the earnest money being returned to them or forfeited to the other party.
How is Earnest Money Applied to the Sale?
Once the buyer and seller have a purchase agreement, the land is taken off the market, and the buyer moves through the purchasing process — securing financing, performing due diligence, and finalizing paperwork.
The earnest money can then be applied to closing costs or the downpayment. So the 5% an investor offered as earnest money toward a rural land deal can now cover a portion of the closing costs. Essentially, you can think of it as cash you were already going to pay. But by including earnest money during the offer, you’ve used it earlier in the buying process rather than at the end.
What Happens if the Deal Falls Through?
Sometimes, a deal that includes earnest money falls through. This can happen for a variety of reasons at the request of the buyer or the seller. In these cases, earnest money helps protect each party.
For example, a buyer may get a better deal on an investment property from an industry connection. So, they aren’t interested in the land they’ve agreed on anymore. They’ll have to back out of the agreement without a contractually valid reason. Because of that, the seller could keep a portion or all of the earnest money as reparations to help cover the costs of relisting the property and hiring another land agent.
On the other hand, a deal could fall through because the land isn’t zoned property for the buyer’s intended use. Or the buyer may find out land doesn’t have access to utilities, and an estimate determines it’s unfeasible or too expensive to connect. In that case, the buyer can exit the contract and typically get the earnest money back.
Work With Texas Land Experts
Buying land in Texas often has unique financing needs. So, working with experts who understand this market can help deals go through much more smoothly — that includes advice on earnest money, what to expect when buying rural land and real estate, and market advice.
If you need financing for an ag loan, get in touch. The experts at Texas Farm Credit have the knowledge and resources to walk you through the buying process.