If a buyer’s asking: “How do I get my earnest money back?” odds are that they’ll have the right to collect it and as the seller, you’ll be SOL. Real estate contracts are generally stacked in the buyer’s favor so that all the way up until the final signatures, they’ve got an escape route (with some exceptions).
Confused? Let’s spell out how this works, when you’re in the right to claim the earnest money the buyer put up, and what you can do to protect against total shock when the home sale you thought was ironclad falls through.
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Earnest money is supposed to tell the seller of a home: ‘We’re serious about buying your house’
An earnest money deposit from a buyer is an indicator to the seller to take the offer seriously.
“It’s there in case the buyer terminates the contract for any reason outside of their contingencies.”
In instances outside of contingencies, the earnest money will default to the seller, and help lessen the blow of a deal falling through. The earnest money might help the seller pay the next month’s mortgage, which they didn’t anticipate having to cover due to the impending sale.
Depending on your state, there are no hard and fast requirements in regards to the amount of your earnest money deposit.
However, the point of earnest money is to show commitment to the property. On average, earnest money deposits are typically 1% of the home’s price. “If it’s a multiple offer situation, and the buyer really wants to make a great impression, they may give 2% to 3%, but 1% is the standard,” Allen says.
Earnest money can almost be considered a down payment on a buyer’s down payment. It’s money they likely already have set aside for the 15%- 20% down at closing, paid out just a little earlier.
The earnest money deposit comes soon after the offer, or in competitive markets, might be attached to the offer itself.
In a typical contract, the time frame for delivering the earnest money check is three days after the binding agreement date.
Some states have strict contract law requirements regarding when the deposit is required: “In the state of Georgia, we do have to have it by no later than 5 days after we go binding,” explains Allen. Look up your state’s requirements to ensure your buyer is being earnest by the book.
The earnest money offer won’t go right into the seller’s pocket. Instead, it’s typically held by a third-party title company in escrow until closing.
When do buyers get their earnest money back?
Now some bad news for sellers: “Basically, it’s really hard for a buyer to lose their earnest money,” says Allen.
If the buyer is working within the guided timeline and purchasing contract, they have several opportunities to break the contract and walk away from the deal, earnest money offering in hand.
Remember, the purchase contract and the earnest money deposit don’t guarantee a sale, but it does ensure that the house is off the market during the home inspection and appraisal.
These are the reasons the buyer of your house will be able to get their earnest money back in a typical real estate contract:
1. Issues that arise during due diligence
The due diligence period can be anywhere between seven days to two weeks, depending on what you’ve negotiated with the buyer in their purchasing contract. During the due diligence period, which varies state by state, the buyer will line up a home inspection, appraisal, title search, and land survey. In that window, the buyer can terminate on the basis of issues that arise during this period.
2. Financing woes
After the due diligence period, the buyer can still get their earnest money back if they get declined for their loan for any reason. Financial contingencies, on average, run between two and three weeks from the binding agreement date.
3. Low appraisal
During the 14 to 21 day window from the binding agreement date, the buyer can invoke the appraisal contingency. If the home appraises at a lower rate than the buyer’s offer, and the seller won’t reduce the price of the home, the buyer can ask for the earnest money back.
4. Deal breakers in the home inspection
Sellers are legally required to detail many of a home’s flaws in a disclosure document, but if the buyer’s home inspection dusts up anything major, they can present a lower offer to the buyer or back out of the deal with earnest money in hand.
It’s rare (not to mention typically illegal on the part of the seller), but if the buyer discovers the seller has not disclosed issues in the home they were legally obligated to, the buyer can get up and leave with the earnest money.
5. Existing house doesn’t sell in time
Similar to a financial contingency, it’s common for buyers who are simultaneously selling a property to have a contingency in place related to the sale of their home. Typically, this contingency stipulates the buyer will not pay two mortgages at the same time. If the buyer’s home doesn’t sell within the timeline they’ve contractually outlined, they are entitled to their earnest money when they back out of the deal.
6. Title issues
In addition to the inspection and appraisal, a title search and land survey will be conducted on the property at this time. If the buyer finds an issue with the title, such as a lien or inconsistencies in ownership, the buyer can void the contract and take back the earnest money deposit.
7. Surprises in the final walkthrough
A final walkthrough isn’t required, but it’s often recommended in a purchasing contract. The final walkthrough takes place a few days, typically between one to five, before closing on the home. If any agreed-upon repairs aren’t completed at this time, the buyer is within their rights to void the contract and take the money.
However, this cuts both ways. In a recent sale, Allen saw a seller take the earnest money deposit after a buyer was disappointed by the repairs made. “The buyer and his agent made a lot of assumptions about the way that it would look, based on a picture that was not attached to the contract,” Allen reasons. “So in that situation, you know, if the buyer walks away because closing is tomorrow, then one would assume that the seller would get the earnest money.”
8. Termination of the deal by the seller
Who knows? The seller might have a change of heart and walk away from the deal for some reason. In that case, you can expect the buyer to have their earnest money deposit restored.
And then there’s closing, technically
This one’s a technicality, but at the end of the day, the buyer will see their earnest money deposit again, as it’s credited towards the down payment. It won’t be in their pocket per se, but it is helping to cover the cost of the estimated 15%- 20% they plan to put down. “It’s basically a little bit of a prepayment on their down payment,” Allen explains.
How sellers can keep the earnest money
When an offer falls through, it can be tough for a seller, especially when it means they won’t even see the earnest money deposit.
A buyer’s purchasing contract can get a seller’s hopes up, and everything can come crashing down when it falls through. While there are certain cases where the buyer is guaranteed to walk away with the earnest money, there are ways for the seller to ask the buyer to get extra serious, ensuring that the seller walks away with the earnest money in the event of a voided contract.
Ask buyers to waive contingencies
You can ask your buyer to waive contingencies, such as those outlined above, in their contract. If a buyer is absolutely sure they are going to buy your home, they might be comfortable with removing financing or appraisal contingencies.
While most buyers won’t be game for this, it all depends on the market. If you’re in a hot neighborhood or in the middle of a booming seller’s market, your buyer could be willing to waive all contingencies to show just how earnest they are.
Additionally, if a pre-inspection has been conducted on the home, a buyer might be comfortable waiving the inspection contingency. And in the case of a cash offer, it’d be reasonable to ask a buyer to waive the financing contingency.
Issues outside the due diligence period
The due diligence period can feel like a free-for-all when it comes to the buyer taking their earnest money deposit back, but outside of that window, the buyer has less wiggle room to walk away with the earnest money. Getting cold feet, or making assumptions outside of pre-agreed upon contract aren’t reason enough for a buyer to walk away with the money.
“Just be as specific as you can be in the contract. That makes it very black and white, and enforceable,” Allen says. “Because the contract says this, and the buyer didn’t do it. Well, then they lose the earnest money.”
Enforce the “time is of the essence” clause to keep the deal moving
Inserting a standard “Time is of the Essence” (TOE) clause into your contract will help the sale maintain momentum.
The provision stipulates that the specific times and dates in the agreement are mandatory. If dates and deadlines aren’t meant, either party has the option to void the contract. More importantly for the seller, a TOE clause in your deal means that if the buyer can’t close on the home for any reason, the seller is able to keep the earnest money deposit.
Cash the check to prevent the buyer from cleaning out the account
In some instances, the earnest money check is held in good faith by a third party, in escrow, but is not cashed. However, the seller is within their rights to ask the third party to cash the check to verify that the funds are indeed available. The money still won’t be available to the seller, but it can prevent the buyer from canceling the check in an attempt to break the contract.
In the event the check doesn’t clear, the seller is within their rights to void the contract for the sale.
Enforcing earnest money collection
No one wants to see the sale of a home fall through, and for lots of sellers, getting the earnest money can feel like a consolation prize that lessens the blow. However, buyers will often argue for their earnest money back, even outside of contingencies.
If the deal collapses, and the case isn’t black and white, both parties can formally submit paperwork to the broker advocating for the earnest money deposit. “Then it takes about 10 days for the broker to work out who is actually going to get the earnest money,” Allen explains. “But it can really get down to a case by case basis.”
At that point, if the broker sides with the seller, the buyer will be put on notice to forfeit the earnest money deposit within 10 days. “And then the buyer can either hire an attorney at that point or you know, make further cases for it. But it rarely gets to that point,” says Allen.
Earnest money deposits are a gesture of good faith, but they’re not a guarantee of a sale. In many instances, both the buyer and seller feel entitled to the money when a deal falls through. However, with a well-established contract, collecting the deposit is pretty black and white.
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