Texas has fast become the hottest real estate market in the United States so far in 2023, making the understanding of how a down payment and earnest money works in Lone Star State real estate sales vital knowledge for commercial homebuyers, developers, and investors.
But exactly how much is earnest money in Texas, and how and when is it paid?
Though not required by law, paying earnest money in Texas—also known as a "soft deposit” or a “good faith deposit”—has become the norm in real estate transactions, and most realtors and property sellers will not push through with a sale without it.
Despite a 15% drop in real estate investment in the United States from 2021 to 2022, the US real estate market is now soaring, with analysts forecasting a Compound Annual Growth Rate (CAGR) of 4% from 2023 to 2028.
Many commercial developers and investors are still keen to get in on the most active real estate markets in the country (including cities along the “Sun Belt”), which means Texas—the state investors are singling out as the US’s number one market for real estate investment—is in their crosshairs.
A 2023 US Investor Intentions Survey conducted by CBRE, a global leader in commercial real estate services and investments, found that commercial property investors are prioritizing secondary markets over gateway markets and identified Dallas-Fort Worth and Austin, Texas, as the most sought-after investment markets in the country.
To add to its real estate accolades, Texas has also been named the highest-ranking state in the country when it comes to real estate building activity and contributions.
According to a 2023 report on the Economic Impacts of Commercial Real Estate by the NAIOP Research Foundation, Texas’ overall contributions of commercial real estate to state gross domestic product sit at $184 billion, with $70.3 billion in direct spending, $69.2 billion in personal spending, and 1.2 million jobs supported in 2022.
While local real estate agents and brokerages are keeping their Texas real estate expertise sharp, commercial property sellers, homeowners, and potential buyers also need to inform themselves on the finer details of the commercial real estate and home buying process—and earnest money deposits, option fees, and other legal payments are part and parcel of it.
Confused by how much earnest money is in Texas?
We’ll simplify matters and walk you through the whole procedure of putting money down by answering frequently asked questions, such as how much you need to shell out, why it’s important to protect your earnest money, and how (and when) to get a refund.
In this comprehensive guide, we’ll cover:
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How much is earnest money in Texas?
Earnest money, also known as a soft deposit or good faith deposit, is money that serious buyers put down on a property before the closing date. Akin to getting pre-approval on a mortgage, earnest money signals that a buyer is highly ambitious to push through with the sale.
In the event that the buyer fails to complete the purchase and the deal falls through, the seller can keep the earnest money as compensation for their time and effort, or earnest money may also be refunded to the buyer, depending on contingencies agreed by both parties in the purchase contract.
On the other hand, if the sale is successfully completed, the earnest money is put toward the purchase price or utilized to cover the closing costs.
Essentially, the purpose of earnest money is that it helps to establish trust between and protect both parties involved in a real estate transaction.
The earnest money is held in an escrow account—a legal arrangement in which a third party temporarily holds property or money until particular conditions have been met—until the transaction is completed, at which point it’s either applied to the buyer's closing costs or refunded if the buyer backs out of the transaction for reasons outlined in the purchase agreement.
Don’t confuse earnest money with option money or option fees, which also have to be paid after signing a Texas purchase agreement on a new home or commercial real estate space.
Option money is a non-refundable payment that can be applied to the final sale price of the property after closing. This payment (around $100-$200 in Texas) grants you an option period, typically lasting between seven to 10 days, during which you can access the property and conduct building and home inspections. Paying the option fee gives potential buyers the right to terminate the contract before the option period concludes.
Both the earnest money and option money must be paid to the escrow agent or title company and not to the seller, as was traditionally the case. The changes were mandated by the Texas Real Estate Commission (TREC) in 2021.
Earnest money is not required to close a home purchase or a valid real estate contract in Texas. However, in competitive markets such as Texas, paying earnest money has become the status quo, and sellers now may not push through with a sale unless it’s provided.
The amount of earnest money to be paid is generally calculated as a percentage of the purchase price and can vary depending on the real estate market and other factors.
Typical earnest money in Texas is 1% of the purchase price, but for in-demand markets like Dallas-Fort Worth and Austin, earnest money of 2% (or more) may be required to beat other offers the seller may receive.
In hotter markets, earnest money deposits can go as high as 10% of the purchase price!
So how much is earnest money in Texas on a $540,000 residential-area building (the median price in Austin)? Well, using this yardstick, it would be between $5,400 and $10,800. Putting down less than the expected amount of earnest money may send the wrong signal that the buyer is not serious or perhaps does not have the finances to see the deal through.
Earnest money should be paid after both buyer and seller have signed the purchase agreement, which will specify the exact amount of earnest money required and the deadline for the payment. Typically, earnest money is paid within a few days of the contract being signed; earnest money in Texas must be paid within three days of the contract’s effective date, for example.
When calculating the earnest money due date, it’s important to remember that 1) weekends and holidays are included in the official day count and 2) the deadline is extended to the next business day when the earnest money due date falls on a legal holiday or weekend.
Earnest money in Texas is paid to the title company or escrow agent, the reliable third party entrusted with safeguarding documents and funds necessary to the transaction until the transaction is successfully completed.
Besides knowing how much earnest money in Texas is, it’s important to be aware of the different payment methods available to commercial real estate buyers and developers.
Below are the payment methods accepted for earnest money in Texas:
While the Texas Department of Insurance (TDI)—the governing body over title companies—simply requires that companies accept “good funds”, buyers should be wary of paying in cold, hard bills as many companies won’t accept large sums of cash. If paying by check, the check must clear first for the earnest money to be considered paid.
If an agent, broker, or another third party is depositing the earnest money on behalf of the buyer, they must sign a Third Party Financing Addendum form, as dictated by TREC.
Yes, earnest money in Texas can be refunded.
If a sale does not go through for any reason, the earnest money may either be kept by the seller or refunded to the buyer, depending on the contract’s stipulations. As a rule of thumb, the buyer gets the earnest money back if the seller reneges on the contract, and the seller keeps the earnest money if the buyer defaults.
There are other reasons that may throw a wrench in the sale process and cause disputes over earnest money. Working with lawyers experienced in real estate transactions is vital to ensuring that the process goes smoothly and everyone is covered. Handling disputes is also much easier with real estate lawyers as they will take over all the formalities and legalities involved.
There are several ways that prospective buyers can protect their earnest money deposits:
Again, working with a good real estate lawyer can take the headaches out of the entire commercial real estate buying process and ensure that everything is secure and legal. Interested commercial real estate developers and investors can contact the Texas Real Estate Commission and the Texas Department of Insurance for further guidance.
Investing in the USA's hottest property market may be stressful for developers and investors, particularly for finding earnest money funds upfront, but arming themselves with the above knowledge will put them in the best position to avoid potential shocks during their next commercial real estate purchase in Texas.
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