As a seller, do you understand the purpose of an earnest money deposit?
Do you know which contingencies protect a buyer? Which one’s protect the seller?
And what happens to the earnest money when a sale falls through?
Breaking up is hard to do…and when a potential sale falls through, the earnest money deposit is often a hotly contested issue.
Dreams are shattered, emotions run high and the flames are fanned by misconceptions surrounding what can be large sums of money.
So let’s STOP the confusion and get the facts straight…learn exactly how earnest money is handled in a Purchase Agreement.
Earnest Money Is A Pledge
That’s only fair, right? The seller’s main goal is to get their home sold, and before removing it from the market…away from the eyes of other potential buyers… you need to have an assurance this buyer is serious.
A serious buyer puts their money where their mouth is!
There Is No Contract Until You Receive the Earnest Money…
True! And the Purchase Agreement is pretty clear about this…
=>If Buyer fails for any reason to timely submit Earnest Money in the contracted amount, Seller may terminate this Agreement upon notice to Buyer
(Line 42 of IAR purchase agreement)
For the buyer, this means they better be timely in getting the promised earnest money to their agent.
And their agent needs to make sure the escrow agent (either the selling broker or other mutually agreed upon third party) receives it within the contract dates as well.
Until the earnest money is received, you are still open to receiving (and accepting) offers from other buyers.
Yes…Even if you have accepted their offer.
Without earnest money, the contract can be voided, with proper notice.
How Much Earnest Money Do You Need?
The short answer? It’s negotiable…
It’s the amount the buyer AND the seller agree is reasonable to take the risk the sale will close.
But there are norms…amounts that are generally accepted as sufficient…in any market.
For our area, $500 if the sale price is under $100,000 and 1% of the purchase price when above that amount.
It can go higher…If you have multiple offers, buyers will often increase their earnest money deposit…proving their intentions… in hopes of winning the bidding war.
When Should Earnest Money Be Returned?
You think you have a solid sale…then the wheels start coming off.
While each contract is different, the three most common contingencies in a purchase contract that can cancel a contract and trigger the return of the buyer’s earnest money are:
- The buyer’s financing falls through
- The buyer’s inspections reveal “major, serious or hazardous” defects AND the seller is “unwilling or unable to repair or replace.”
- The home doesn’t appraise for the purchase price.
There may still be room for negotiations, but when an agreement can’t be reached, the buyer is due their earnest money back.
When Can Earnest Money Be Retained?
Unfortunately for some buyers, there is no “Cold Feet” clause.
“I’ve changed my mind” isn’t a good enough reason to walk away from a contract without consequesnces.
These situations can arise when:
- The buyer rushes into a purchase and realizes your home doesn’t really fit their needs. As an example, suppose your home doesn’t have A/C and the buyer didn’t realize it when submitting an offer? As long as the lack of A/C was properly disclosed, this oversight is squarely on them.
- Major defects are discovered in the inspection process and you are willing to make any needed repairs…but the buyer has lost faith in the home and no longer wants to purchase.
Sometimes a buyer will realize they have no right to expect their earnest money returned and simply ask to be released from the contract.
Other times, especially if they don’t understand the contractual obligations of the Purchase Agreement, a buyer will dig in their heels, demanding to get their money back
You say “No”…and the swords are crossed!
There’s a Process for That!
It’s happened before and will likely happen again…
The law would rather you settle this matter between yourselves, but when that’s unlikely…or completely impossible… there’s a prescribed legal path.
Most importantly, the escrow agent cannot decide WHO get’s the money…they can only act on a written agreement between the parties, appropriately named a “Mutual Release”.
Or an order from the court.
Without an agreement, the listing Broker sends a letter to all interested parties letting them know the money in dispute will be released to the seller at the end of 60 days unless:
- An agreement is reached in writing
- Or a suit is filed in Small Claims court
Is heading of to court worth it? Is keeping the earnest money worth the hassle, the cost and the extra frustration?
Only you can be the judge of that…at least, you know the options.
Know Your Contract
I want to write this in RED!!
A purchase agreement is so much more than just the price being offered. You owe it to yourself to thoroughly understand the this document.
When you first list your home, ask for a sample copy of a purchase agreement…read it over, highlight the areas you don’t understand…then ask questions!
Or you can Let me know by clicking here and I’ll email you one right away…
It’s more important than ever to be completely informed when you decide to sell.