The overwhelming majority of real estate transactions will entail the buyer depositing earnest money into the escrow agent’s account to hold while the home is under contract. The escrow agent is typically the real estate attorney who is the third party conducting the closing so it does not have an interest in the money. Individuals unfamiliar with the home buying process might mistakenly believe that the earnest money is turned over to the seller to hold. This is not the case. Buyers might be hesitant to deposit earnest money due to the fear that once the money is deposited, it is gone for good. This is also false. Earnest Money may actually work in the buyer’s favor and help the buyer’s chances for convincing the seller to go through with the sale. The money is held in the escrow account and what happens to it depends on what happens with the sale of the property.
In a successful purchase and sale situation, the earnest money is applied to the purchase price. The earnest money could also end up in the seller’s hands even if the sale does not go through. It could also end up back with the buyer if the contract is cancelled. This last situation is the focus of today’s blog post.
As discussed in a previous post about financing and a later post about inspections, certain contingencies must be satisfied for a sale to close. A seller will most likely be reluctant to take a property off of the market and stop advertising it for sale unless he knows the buyer is serious about going through with the purchase. The earnest money is the opportunity for the buyer to put the seller’s concerns to rest. The amount of the deposit might be a percentage of the sales price or it might simply be a dollar amount that is substantial enough to indicate the buyer’s intentions to go through with the purchase once certain conditions are met. Real estate contracts are designed so if the buyer makes a good faith effort to purchase the property, but due to insufficient inspection results or inability to secure financing and is unable to go through with the purchase, the buyer can legally demand and receive all earnest money deposits back.
The buyer must be careful to follow the guidelines within the contract if he is to receive the deposit back. If the buyer is going to cancel due to something discovered through the property inspections, he must do so within the inspection time period and must provide inspection reports if so required. As long as he does so, the escrow agent is legally required to return the deposit. With a financing contingency, the buyer must inform the seller within the financing period in order to receive the deposit back.
Just because a buyer does not want to go through with the purchase it does not necessarily mean he gets his deposit back. Once certain dates have passed and contingencies released, the earnest money goes “hard” or is non-refundable. At this point, the earnest money will end up with the seller whether the sale goes through or not.
There is no shortage of lawsuits surrounding earnest money deposits. Buyers and sellers should be wary of how purchase contracts handle situations where the earnest money is refundable versus non-refundable. Earnest money deposits are intended to show good faith on the part of the buyer to honor his side of the contract and to convince the seller to let him have some time to try and make the purchase work. Buyers need to understand the contractual obligations outlined in a real estate contract. Sellers need some recourse in the event that a buyer tries to cancel the contract absent a valid contractual reason. The buyer may not be able to perform and go through with the purchase so demanding a buyer close will not work. The earnest money is the seller’s best chance for some form of remedy. It might not prevent a lawsuit, but a seller might be more willing to let a buyer walk away from a deal if he at least has the deposit to help soften the blow.
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