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The Honolulu Advertiser
Posted on: Friday, March 10, 2006

Home buyers still need chunk of cash up front

 •  Hawai'i Real Estate Report

By Tomoeh Murakami Tse
Washington Post

WASHINGTON Lauren and Chris Abi-Najm moved here from Georgia last winter with a plan: They would save up and buy a place of their own. And to save up, they would move in with his parents in suburban Lorton, Va.

With two good jobs he's a computer network engineer and she's an occupational therapist it seemed feasible.

But the high home prices here stunned the couple. They found a condo they liked in a new development in suburban Virginia for $423,000. Then they had to contend with another big number: a 5 percent earnest-money deposit.

"Twenty-two thousand? I definitely thought, that's a lot of money," said Lauren Abi-Najm, 28. She and her husband were thousands of dollars short.

Throughout the recent housing boom, many young buyers have relied on low- or no-down-payment mortgages to purchase houses they otherwise may not have had the cash to afford. So-called 103 percent loans even cover closing costs. But even in these times of low down payments, first-time home buyers are finding that they still need cash a lot of it sometimes.

That money goes to up-front deposits, often called earnest money. For new homes, the deposit amount is set by the builder and paid to reserve a unit. In resales, the amount is more loosely defined. In the recent buying frenzy, the size of the deposit sometimes became the determining factor in who won a bidding war.

Because deposits represent up to 10 percent of the purchase price, they have mushroomed along with home prices. That has sent would-be homeowners scrambling for cash from parents, second jobs, even retirement funds. Real estate agents say some have resorted to more creative measures, such as negotiating signing bonuses on their first jobs, selling belongings on eBay and, in at least one case, pawning a family heirloom.

"The earnest money is one of the single biggest problems for young people," said Donna Evers, president of Evers & Co. Real Estate Inc. in Washington.

"It is a dilemma for young buyers who don't have a history of savings. Most people aren't going to take their houses off the market for a tiny earnest money deposit," said Denise Champion, a Washington-based real estate agent with Long & Foster.

So just how much earnest money should buyers offer?

Customary deposits vary by location and type of housing. Generally, a good guideline is 5 percent to 10 percent of the purchase price, Evers said: For a $400,000 house, buyers can expect to put up $20,000 to $40,000 in earnest money.

That cash serves as a safety blanket for sellers because buyers risk losing it if they back out of a deal. For buyers, the deposit is a way to show they are sincere about their offer. Earnest money is not given to the seller but put into an escrow account. If the offer is rejected, the money is returned to the buyer. If it is accepted, the cash is generally used toward the down payment or closing costs, or returned to the buyer at settlement.

A hefty earnest-money deposit can impress, but it is just one element sellers consider when deciding whether to accept a bid. Real estate agents say a weak deposit can be offset by a strong letter from a lender, high credit scores and solid financial statements.

Heather and Brett Huhman, who moved to suburban Montgomery County last year after graduating from the University of Missouri at Columbia, had little to offer in earnest money: just $2,000 scraped together from cash gifts from their June wedding.

"To us, that was a lot of money," said Heather Huhman, 22. But it represented just half a percent of the asking price on a townhouse. "We were definitely concerned. But we didn't really have other options."

It helped that the three-bedroom unit had been on the market for a while. And that both the Huhmans had good credit: They learned they could buy a home through a zero-down loan for a monthly payment that was not much more than the rent they were paying. They also have good jobs: He is an electrical engineer; she is in public relations. And the seller was willing to work with them. To avoid paying closing costs up front, the couple bid $15,000 above the asking price and the seller paid the closing costs.

One way to come up with a solid earnest-money offering, of course, is the old-fashioned way: save. But increasingly, few are patient enough for that, real estate agents and mortgage brokers said.

"We as a society can get everything we want immediately," said Mark Chilli, a loan officer with suburban Mortgage Capital Investors. "If I want a car, I can get it now with a lease. If you go to Best Buy, you can buy a plasma screen TV for zero percent financing."

Buyers have located cash for deposits in unexpected places. Some have temporarily liquidated their stocks or sold their cars, real estate agents said. One young couple hawked a diamond necklace, a family heirloom, for half its value for a $5,000 deposit, said Todd Hetherington of suburban Century 21 New Millennium. Another buyer got a $20,000 earnest-money deposit from her boss. "She had been working for this guy for a long time. He kind of looked at her almost as a daughter," said Maura Sullivan of Long & Foster in Woodbridge, Va.

The Abi-Najms turned to what Evers calls "the Bank of Mom and Dad."

Last June, Francois and Regina Abi-Najm accompanied their son and daughter-in-law to the project and put down the $22,000 deposit on the spot. Chris and Lauren Abi-Najm expect to move into the two-bedroom condo after construction is finished in July.

"It was impossible to afford anything right away," said Lauren Abi-Najm, now the mother of a baby boy. "I really don't know how we could have done it without them."

Her in-laws said it never occurred to them not to pitch in. It doesn't matter if they get the money back or not, they said.

"We come from a large family, and we all help each other," Francois Abi-Najm said, adding, jokingly, "It's not for them it's for my grandson."