When you want to buy a house in Nigeria, one important step you must understand is the earnest money deposit. This is a small amount of money you pay to show the seller that you are serious about buying their property. Think of it as a promise or handshake that says, “I really want this house.” Usually, this deposit is about 1% to 5% of the property price, but it can change depending on the market and the seller’s demand.
In Nigeria’s busy real estate market, earnest money can help to protect both buyers and sellers. It gives the seller confidence to take the house off the market while you complete inspections and arrange payment. If you back out without a good reason, the seller may keep this money as compensation. But if the deal falls through due to problems like failed inspections, you can get your deposit back. In this informative write-up, we will open your eyes to some of the important things you need to know about earnest money deposit when buying a home in Nigeria.
Purpose of earnest money in real estate transactions
Shows seriousness and commitment
When a buyer puts down earnest money, it tells the seller that the buyer is serious about buying the property. This is important because it stops the seller from selling the property to someone else while the buyer completes the buying process. It is like a promise that says, “I really want to buy this house” and not just looking around.
Secures the property
Once the earnest money is paid, the seller usually takes the property off the market for a certain time. This gives the buyer time to do important things like checking the property’s condition, getting a mortgage, or arranging funds without worrying that someone else will buy it first. This period is important because buying a house is a big decision that takes time.
Protects both buyer and seller
Earnest money protects both sides in the deal. For the seller, it is a kind of security. If the buyer suddenly changes their mind and backs out without a good reason (which should be written in the agreement), the seller can keep the earnest money as compensation for losing other potential buyers and wasting time. On the other hand, if the seller decides not to sell, the buyer usually gets their earnest money back.
Helps in negotiations
In Nigeria’s real estate market, the amount of earnest money can sometimes be negotiated based on the property’s price and the seller’s preference. Offering a higher earnest money deposit can make a buyer’s offer more attractive, especially when many people want to buy the same property.
The summary below can help you to better grasp what earnest money means:
- Earnest money shows the buyer’s serious intention to buy a property.
- It holds the property for the buyer while they complete checks and financing.
- It protects the seller from losing time and other buyers if the buyer backs out without a valid reason.
- It can be refunded to the buyer if the deal falls through for reasons agreed in the contract, like a failed inspection.
- The amount is usually a percentage of the property price and can be negotiated.
How much earnest money should you pay?
In Nigeria, just like in many other places, earnest money usually ranges from 1% to 5% of the property’s purchase price. This means if the property costs ₦10,000,000, you might pay between ₦100,000 and ₦500,000 as earnest money.
Factors that influence the amount:
- Property price: The higher the price, the larger your earnest money deposit will be.
- Market conditions: If the property market is very competitive, sellers might expect a higher earnest money deposit to show you are serious.
- Seller’s preference: Sometimes the seller suggests how much earnest money they want, or they may wait for your offer.
- Your financial situation: You should consider what you can afford without risking too much money upfront.
Why not pay too little or too much?
Paying too little might make your offer less attractive to the seller. Paying too much, however, puts more money at risk if the deal falls through and you lose the deposit. So, it’s about finding a balance that shows good faith but protects your finances.
What happens to the earnest money?
If the deal goes through, your earnest money usually goes toward your down payment or closing costs. If the deal falls apart because of issues like failed inspections or the seller backing out, you might get your earnest money back. But if you back out without a good reason, you may lose the entire earnest money deposit.
Practical tips you must know
- You should always get a written agreement specifying how much earnest money you are paying and under what conditions it can be refunded.
- Use a secure method for payment, such as a bank transfer or escrow account, to protect your funds.
- It is in your best interest to consult a real estate lawyer or agent who understands Nigerian property laws to guide you on the right amount and process.
When and how to pay earnest money?
When to pay earnest money
Once you and the seller agree on the price and terms of the property sale, you usually pay the earnest money soon after. In many cases, this is within a few days of signing the purchase agreement or sales contract. The exact timing is often written in the sales agreement. Sometimes, the payment is due immediately after signing; other times, it might be set for a specific date or after certain conditions like a property inspection are met.
Note that paying earnest money happens early in the buying process, before the final closing. It shows the seller you are serious and stops them from selling the property to someone else while you complete your checks and financing.
How to pay earnest money
In Nigeria, earnest money can be paid by bank transfer, certified cheque, or other secure payment methods agreed upon by both parties. You should avoid cash payments to keep a clear record. The money is usually held by a trusted third party, such as a real estate agent, lawyer, or an escrow service, not directly to the seller. This protects both buyer and seller until the deal is complete.
Earnest money is usually between 1% and 5% of the property price. The exact amount depends on the property’s value and what you and the seller agree on. A higher earnest money deposit can make your offer more attractive to the seller. You should always get a receipt or written proof of your earnest money payment. This is important for your records and may be needed by your lender if you are applying for a mortgage.
In addition, make sure the sales agreement clearly states when the earnest money is due, how it will be held, and under what conditions it can be refunded if the sale does not go through. You should only pay earnest money through verified channels and to trusted parties. It is also essential to confirm all payment details before transferring funds to avoid fraud.
If the deal falls through due to reasons like failed property inspection or inability to get financing, you may get your earnest money back if these are stated as contingencies in the contract. Otherwise, you risk losing it.
Why earnest money matters for buyers
By paying earnest money, you tell the seller that you are not just looking around or wasting time. You are genuinely interested and ready to buy. This is important because many sellers receive multiple offers, and your earnest money makes your offer stand out as serious.
Once you pay earnest money and the seller accepts your offer, the property is taken off the market. This means the seller won’t sell it to someone else while you arrange for inspections, financing, or other checks. It gives you time to complete these without the risk of losing the property to another buyer. In Nigeria, where property transactions can sometimes be tricky, earnest money acts as a bridge of trust. It reassures the seller that you are committed, and it also protects you because the money is usually held by a trusted third party or in escrow until the deal is completed.
How earnest money protects property sellers
For sellers in Nigeria, accepting earnest money means they can confidently take their property off the market. This is important because once a seller agrees to sell and accepts earnest money, they stop looking for other buyers. During this time, they still have to pay for things like mortgage, property maintenance, and utility bills. The earnest money helps protect sellers from losing money if the buyer suddenly backs out without a good reason.
Protection against unreliable buyers
Earnest money acts like a financial guarantee. If the buyer changes their mind for no valid reason, the seller can keep the earnest money as compensation for their time and potential losses. This discourages buyers from making casual offers or trying to hold multiple properties at once without real commitment. It ensures that only serious buyers enter into agreements with sellers.
Legal framework
In Nigeria, earnest money agreements are usually governed by clear contracts that protect both parties. These contracts specify under what conditions the earnest money can be refunded to the buyer or forfeited to the seller. Using a reputable escrow service or legal firm to hold the earnest money ensures transparency and trust throughout the transaction.
Key terms in purchase contracts related to earnest money
- Deposit amount: This is the actual sum of money you pay as earnest money. It can be a fixed amount or a percentage of the property price, often between 1% and 5%, depending on how competitive the market is and the seller’s preference. For instance, if a house costs ₦30 million, a 2% earnest money deposit would be ₦600,000.
- Escrow account: Usually, the earnest money is safe in an escrow account. This account is managed by a neutral third party like a lawyer, real estate agent, or bank. The money stays there until the sale is completed or canceled. This protects both buyers and sellers.
- Good faith deposit: Earnest money is also called a good faith deposit because it shows you are serious about buying and not just wasting the seller’s time.
- Contract terms: The purchase contract will clearly state what happens to the earnest money. For instance, if you back out of the deal without a valid reason, you may lose the deposit to the seller as compensation for taking the property off the market. However, if the seller cancels, you should get your money back.
- Non-refundable vs. refundable: In Nigeria, earnest money is often non-refundable unless the contract specifies conditions like the property failing inspection or other agreed reasons. Always check the contract carefully before paying.
- Application to purchase price: When the sale is finalized, the earnest money usually counts toward your down payment or closing costs. So, it’s not an extra cost but part of the total payment for the property.
Differences between earnest money and down payment
What is earnest money?
As described earlier, earnest money is a small deposit you pay to the seller when you make an offer to buy a property. It shows that you are serious and committed to buying the property. This money is usually about 1% to 3% of the property price. It acts like a “promise” to the seller that you want to proceed with the purchase. The seller holds this money, often in an escrow account, until the deal is completed. If you back out without a good reason, you might lose this money to the seller as compensation for taking the property off the market.
What is down payment?
The down payment is a larger sum of money you pay later in the buying process, usually at the point of closing the deal. This is a portion of the total purchase price, often ranging from 10% to 30% in Nigeria, depending on the agreement or mortgage requirements. The down payment is part of the total price you pay to officially own the property. It reduces the amount you need to borrow if you are financing the purchase through a mortgage. Unlike earnest money, the down payment is non-refundable and goes directly toward buying the property.
Key differences between the two
| Aspect | Earnest Money | Down Payment |
| Purpose | Shows you are serious about buying | Part of the actual purchase price |
| When paid | When making an offer | At the final stage (closing) |
| Amount | Small (1%-3% of property price) | Larger (10%-30% or as agreed) |
| Refundability | May be refunded if deal falls through | Usually non-refundable |
| Who holds the money | Seller or escrow agent | Seller (or developer) |
| Effect if buyer backs out | Buyer may lose earnest money | Buyer loses down payment if contract breached |
How they work together
When you find a property you want, you give the seller earnest money to show you mean business. This helps the seller take the property off the market while you arrange finances. Later, when everything is ready, you pay the down payment to complete the purchase. The earnest money you paid earlier is usually deducted from your down payment, so it’s not an extra cost but part of the total amount you owe.
Why knowing the difference matters
Many Nigerians confuse earnest money with down payment, thinking they are the same. But mixing them up can cause problems. For instance, if you think earnest money is refundable like a down payment, you might lose money if you back out. Also, understanding these terms helps you negotiate better and plan your finances properly when buying property.
Common contingencies that affect earnest money refunds
What are contingencies?
Contingencies are specific conditions written into the property sale contract that must be met for the sale to proceed smoothly. If these conditions are not fulfilled, the buyer can usually cancel the deal and get their earnest money refunded. For Nigerian buyers, knowing these common contingencies is very important because real estate transactions here can sometimes be complicated and slow.
Common contingencies that affect earnest money refunds
Financing contingency
This protects you if you cannot get a loan or mortgage to pay for the property. In Nigeria, many buyers rely on bank loans or other financing. If your loan application is rejected or delayed beyond the agreed time, you can cancel the purchase and get your earnest money back, provided this contingency is included in the contract.
Inspection contingency
This allows you to inspect the property for defects or issues before finalizing the purchase. If the inspection reveals serious problems like structural damage or legal issues with the property, and the seller refuses to fix these or lower the price, you can back out and reclaim your earnest money. This is especially useful in Nigeria where properties may sometimes have hidden defects.
Appraisal contingency
If the property is valued lower than the price you agreed to pay, this contingency lets you renegotiate or cancel the deal. Without this, you risk losing your deposit if the property’s market value is less than expected.
Title contingency
This ensures the seller has a clear legal title to the property. In Nigeria, where land ownership can be complex, this contingency protects you from buying a property with disputed or unclear ownership. If the title is not clear, you can cancel and get your earnest money back.
Sale of existing home contingency
Sometimes, buyers want to sell their current home before buying a new one. This contingency allows you to back out if you cannot sell your existing property, protecting your earnest money.
How these contingencies work in Nigeria
The earnest money is usually held by a neutral third party (like a lawyer or escrow agent) until the sale is complete. If any of the above contingencies are not met, and you decide to cancel within the agreed time, your earnest money should be refunded. If you back out without a valid contingency or after deadlines, you may lose your deposit, as the seller could keep it as compensation for lost time and other buyers.
How to get your earnest money back if the deal falls through
Understand the terms of your agreement
Before anything at all, always read the purchase agreement carefully. This contract will state the conditions under which you can get your earnest money back. In Nigeria, if you back out without a valid reason stated in the contract, the seller can keep your earnest money as compensation for taking the property off the market.
Use contingencies to protect yourself
Contingencies are special conditions included in the contract that allow you to cancel the deal and still get your earnest money back. Common contingencies include:
- Home inspection contingency: If an inspection shows serious problems (like structural damage or termite infestation) and the seller refuses to fix them, you can back out and keep your deposit.
- Financing contingency: If you are unable to get a loan or mortgage to pay for the property, you can cancel the deal and get your earnest money back.
- Appraisal contingency: If the property’s value appraises lower than the agreed price and you and the seller don’t agree on a new price, you can walk away with your deposit.
- Sale of current home contingency: If you need to sell your current home first and cannot, this contingency protects your earnest money.
Communicate in writing
If you decide to back out for a valid reason covered by a contingency, you should inform the seller in writing before the deadline specified in the contract. This written notice is crucial to show that you are following the rules and to avoid losing your deposit.
Sign release forms
Once the seller agrees that you can back out, both parties usually need to sign a release form. This document confirms that you will get your earnest money back and that the deal is officially cancelled.
What does Nigerian law say about earnest money?
In Nigeria, earnest money deposits are governed by several laws including the Nigerian Contract Law, the Land Use Act of 1978, and financial regulations from the Central Bank of Nigeria. These laws ensure that the agreement between buyer and seller is legally binding and that the deposit is handled properly. Contract Law requires that the earnest money agreement must have clear terms like the amount, payment method, and conditions for refund or forfeiture. In addition, the Land Use Act affects land ownership and transfer, so earnest money agreements must comply with land ownership rules. Also, financial regulations ensure that deposits are handled securely, often through escrow accounts managed by trusted third parties like lawyers or real estate firms.
Buyer’s rights on earnest money in Nigeria
Right to a clear agreement
Buyers must ensure that the earnest money terms are clearly written in the contract. This includes how much is paid, when it must be paid, and under what conditions it can be refunded. Without a written contract, disputes are common.
Refund conditions
If the buyer follows all contract terms, they usually get their earnest money back. For instance, if the deal falls through due to issues like financing problems or property defects (which should be stated as contingencies in the contract), the buyer can reclaim the deposit. However, if the buyer simply changes their mind without a valid reason, the seller can usually keep the earnest money as compensation for taking the property off the market.
Deposit amount and refundability
In Nigeria, if the earnest money deposit is more than 10% of the purchase price, it is often considered non-refundable. Deposits less than 10% may be refundable if agreed upon in the contract. This protects sellers from buyers who might back out without good cause.
Use of escrow accounts
To protect the buyer’s funds, earnest money should be paid into an escrow account held by a neutral third party, such as a law firm or real estate brokerage. This prevents the seller from accessing the money until all contract conditions are met. Buyers should always get a receipt and confirm that the money is in escrow to avoid fraud or misuse.
Legal remedies if disputes occur
If there is a disagreement about the earnest money, Nigerian law allows buyers to seek legal help. Courts can order the release or refund of the deposit based on contract terms. Also, escrow agents who mishandle funds can be held liable.
Risks when handling earnest money deposits
Loss of deposit if contract terms are broken
If you, as a buyer, fail to meet the terms agreed in the contract, such as missing deadlines for inspections or financing, you risk losing your earnest money deposit. Sellers may keep the deposit as compensation for the failed deal.
Scams and fraud
There is a risk of scams where dishonest parties may ask for earnest money deposits directly or through fake intermediaries. This is especially risky if you send money directly to the seller without proper safeguards.
Lack of clear contract terms
Without a written and clear contract detailing contingencies like financing approval or property inspections, you may lose your deposit unfairly. Verbal agreements or vague contracts increase the risk of disputes.
Improper handling of funds
If the earnest money is not held by a trusted third party (like a reputable real estate agency or legal firm), the funds could be mishandled or withheld improperly.
Precautions to protect your earnest money deposit
- Verify the credentials of all parties: Check the legitimacy of the agents, lawyers, or companies involved in holding or managing the earnest money to avoid falling victim to fraud.
- Keep proof of payment: Always get a receipt or written confirmation when you pay your earnest money. This document is crucial if any dispute arises.
- Adhere strictly to contract deadlines: Meeting timelines for inspections, financing, and other contract conditions is essential to avoid forfeiting your deposit.
Tips for negotiating earnest money amounts
You need to first check how much similar properties in the area are selling for. This helps you decide a fair earnest money amount. If the market is hot and many buyers want the property, you might need to offer a higher earnest money to stand out. But if it’s a slow market, you can negotiate for a lower amount. The tips below will help out a lot:
Consider the seller’s situation
Try to find out why the seller is selling. If they need quick cash, they might want a higher earnest money deposit. If they are flexible, you can negotiate for a smaller deposit. Building a good relationship with the seller or their agent can help you understand their needs better.
Negotiate the terms clearly
Don’t just focus on the amount. Discuss when and how you will pay the earnest money, and under what conditions you can get it back if the deal falls through. For instance, if you find problems during an inspection or can’t get financing, you should be able to get your earnest money refunded. Make sure all these terms are written down clearly in the agreement.
Use earnest money as a bargaining tool
If you want the seller to reduce the overall price, you can offer a higher earnest money deposit to show you are serious. This might convince the seller to accept a lower price or better terms. On the other hand, if you want to reduce your upfront cost, ask if you can pay a smaller earnest money but agree on a faster closing date or other benefits for the seller.
Don’t be afraid to negotiate respectfully
Negotiation is normal in Nigerian property deals. However, it is important that you explain your reasons politely if you want to offer less earnest money. For instance, if you need time to arrange financing, tell the seller and ask if they can accept a lower deposit for now. Being honest and respectful can make the seller more willing to work with you.
Get everything in writing
Once you agree on the earnest money amount and terms, make sure it is all written in the contract (we cannot emphasize this point enough!). This protects you and the seller and avoids confusion later. Include details like the amount, payment deadline, refund conditions, and what happens if either party backs out.
Role of real estate agents and lawyers in managing earnest money
Handling earnest money properly requires the help of professionals, like real estate agents and lawyers, who play important roles in managing this deposit smoothly and safely. The roles of each professional will be discussed below:
Role of real estate agents
In Nigeria, real estate agents are your trusted guides through the property-buying journey. Regarding earnest money, their role includes:
- Explaining earnest money importance: Agents help you understand what earnest money is and why it matters. They explain how it shows your commitment to the seller and helps hold the property while paperwork and payments are completed.
- Negotiating terms: Agents negotiate with the seller on your behalf to agree on the amount of earnest money and the conditions under which it can be refunded or forfeited. This negotiation helps protect your interests and makes your offer more attractive.
- Handling payment and documentation: Agents often coordinate the payment of earnest money, ensuring it is made properly and a receipt is issued. They also help prepare and review the sales agreement to include clear terms about the earnest money.
- Holding funds safely: In some cases, agents may hold the earnest money in trust or direct it to an escrow account, which keeps the money safe until the transaction is completed or canceled.
- Providing market insight: Agents advise on the appropriate amount of earnest money based on current market conditions and property value, helping you avoid overpaying or losing your deposit unnecessarily.
Role of lawyers
Lawyers are crucial for the legal protection of your earnest money deposit in Nigeria. Their responsibilities include:
- Drafting and reviewing contracts: Lawyers carefully draft or review the earnest money agreement and sales contract to ensure all terms are clear, legal, and protect your rights. They make sure the contract specifies how and when the earnest money is paid, refunded, or forfeited.
- Ensuring legal compliance: Real estate transactions must follow Nigerian laws. Lawyers ensure the earnest money agreement complies with all relevant regulations, preventing legal problems later.
- Conducting due diligence: Lawyers investigate the property title and check for any liens or disputes that could affect your purchase and the earnest money arrangement.
- Advising on contingencies: They help include contingency clauses in the contract. These clauses allow you to get your earnest money back if certain conditions are not met, such as failed inspections or financing issues.
- Resolving disputes: If disagreements arise about the earnest money, lawyers represent your interests, negotiating settlements or taking legal action if necessary to recover your deposit or enforce the contract.
- Protecting your interests: Lawyers act as your fiduciary, meaning they work in your best interest, giving you sound advice and confidentiality throughout the transaction.
Differences in earnest money practices between new builds and resale homes
When buying a property in Nigeria, whether it’s a brand new house (new build) or an already existing one (resale home), you’ll likely be asked to pay earnest money. As mentioned severally earlier, this is a deposit that shows you are serious about buying the property. However, the way earnest money works can be quite different depending on if you’re buying a new build or a resale home.
Earnest money for new builds
For new builds, the builder (developer) usually sets a fixed amount or percentage for the earnest money. This is often non-negotiable and must be paid before the construction or allocation of your unit begins. The builders often require a larger earnest money deposit for new homes. In some cases, this can be as high as 10% of the property price, especially for popular or luxury developments.
In addition, the earnest money you pay for a new build is sometimes treated as part of your down payment. When the house is completed and you’re ready to close, this money is deducted from the total amount you owe. Because the builder sets the rules, there’s usually less flexibility to negotiate the amount or terms of the deposit. The process is more standardized compared to resale homes.
In some cases, the builder may use your earnest money to fund part of the construction, rather than keeping it in a separate escrow account.
Earnest money for resale homes
For resale homes, the earnest money amount is more flexible. You and the seller (or their agent) can negotiate the deposit, which is often between 1% and 5% of the property price, depending on the market and the value of the home. In a hot market, offering a higher earnest money deposit can make your offer more attractive to the seller, especially if there are other interested buyers.
Furthermore, the earnest money for resale homes is usually held by a neutral third party (like a lawyer or real estate agent) in an escrow account until the deal is finalized. This protects both the buyer and the seller. If the deal falls through for reasons stated in the contract (like failed inspections or title issues), your earnest money can be refunded. But if you back out without a valid reason, you may lose your deposit.
Summary table
| Feature | New Builds | Resale Homes |
| Who sets the amount? | Builder (fixed, less negotiable) | Negotiated between buyer and seller |
| Typical deposit size | Higher (up to 10%) | Lower (1%-5%) |
| Use of deposit | May fund construction; part of down payment | Held in escrow; applied to closing/down payment |
| Negotiation flexibility | Low | High |
| Refund policy | Depends on builder’s policy | Often refundable under contract terms |
| Who holds the money? | Builder or developer | Escrow account (lawyer/agent) |
For a new building, you should be ready to pay a higher, non-negotiable deposit and know that your money might be used for construction. Make sure you trust the builder and understand their refund policy before paying.
For a resale home, you will have more freedom to negotiate the deposit amount and terms. The money is usually safer, held by a third party, and you have a better chance of getting it back if something goes wrong with the deal.
Conclusion
As we have shown you in the write-up above, earnest money is a small but serious deposit that shows the seller you are committed to buying their property. Usually, it is between 1% and 5% of the purchase price and acts as a sign of good faith. If everything goes well, this money will be applied to your final payment. However, if you back out without a good reason, you might lose this deposit. On the other hand, if the deal falls through because of issues like a failed inspection or title problems, you may get your earnest money back. To protect yourself, always work with trusted real estate agents and lawyers who understand Nigerian property laws. They will help you handle the earnest money safely, draft clear agreements, and avoid losing your deposit unfairly. You need a good understanding of how earnest money works as this will help you buy property with confidence and peace of mind in the country.
