{"id":16569,"date":"2020-05-11T06:51:11","date_gmt":"2020-05-11T13:51:11","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=16569"},"modified":"2024-03-30T04:07:00","modified_gmt":"2024-03-30T11:07:00","slug":"when-can-seller-keep-earnest-money-coronavirus","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/when-can-seller-keep-earnest-money-coronavirus\/","title":{"rendered":"When, If Ever, Do Sellers Keep the Earnest Money During Coronavirus?"},"content":{"rendered":"<p>You\u2019ve accepted an offer on your house from a buyer that included a sizable amount of <a href=\"https:\/\/www.homelight.com\/blog\/how-to-protect-earnest-money\/\">earnest money<\/a>, but now they\u2019re backing out of the sale due to coronavirus uncertainty. Is that deposit yours to keep?<\/p>\n<p>\u201cWho is legally entitled to the earnest money depends on what causes the sale to be cancelled and when it is cancelled, explains <a href=\"https:\/\/rosenthalmeyer.com\/meet-our-team\/\">Justin Meyer<\/a>, a real estate attorney licensed in Florida, New York, and New Jersey. \u201cHowever if the buyer loses their job after the mortgage approval contingency period, and the approval is revoked, they could be at risk of losing their escrow deposit.\u201d<\/p>\n<p>Even if you do get an offer while selling during the pandemic, the timeline could be loose, or the deal could fall apart. While some buyers are simply walking away from their earnest money, others are not.<\/p>\n<p>This understandably puts you, the seller, in a tough spot, especially in light of new <a href=\"https:\/\/www.homelight.com\/blog\/real-estate-coronavirus-clauses-sellers\/\">coronavirus amendments<\/a> that give buyers extra leeway in the contract. Let\u2019s take a look at how coronavirus has changed the stakes in terms of earnest money \u2014 and where you stand as the seller.<\/p>\n<figure id=\"attachment_16573\" aria-describedby=\"caption-attachment-16573\" style=\"width: 700px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency.png\" target=\"_blank\"><img decoding=\"async\" width=\"666\" height=\"381\" src=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-666x381.png\" class=\"attachment-content size-content\" alt=\"Clipboards used during a coronavirus home sale.\" srcset=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-666x381.png 666w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-64x37.png 64w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-128x73.png 128w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-192x110.png 192w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-432x247.png 432w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency-500x286.png 500w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-contingency.png 700w\" sizes=\"(max-width: 666px) 100vw, 666px\" \/><\/a><figcaption id=\"caption-attachment-16573\" class=\"wp-caption-text\"><\/a> Source: (Joyce McCown \/ Unsplash)<\/figcaption><\/figure>\n<h2>How earnest money works<\/h2>\n<p>Earnest money is a <a href=\"https:\/\/www.bankrate.com\/glossary\/e\/earnest-money\/\">good faith deposit<\/a> meant to commit your buyer to closing on the deal, but real estate contracts are rarely ironclad. Even prior to the pandemic, buyers had three main contingencies that allowed them to walk away from the deal while keeping their earnest money:<\/p>\n<ul>\n<li><b>Inspection Contingency<\/b>: This contingency grants the buyer a set number of days to conduct a physical home inspection. If the inspection reveals serious, undisclosed issues, the buyer can back out of the purchase without losing their earnest money.<\/li>\n<li><b>Appraisal contingency<\/b>: This contingency comes into play if the property does not appraise at the purchase price. If that happens, the buyer can back out of the sale, sometimes because the bank will not approve a loan for more than the appraised value.<\/li>\n<li><b>Financing Contingency<\/b>: This contingency allows the buyer to back out if they are unable to ultimately get a mortgage to finance the purchase. This is the contingency most likely to come into play in this scenario, as many buyers find themselves unexpectedly furloughed or otherwise unemployed due to COVID-19.<\/li>\n<\/ul>\n<p>A deal could fall apart for any of these reasons both pre- and post-pandemic \u2014 and in most cases the earnest money would leave right along with your buyer. Now, as for a home sale that falls apart specifically due to COVID-19? That adds another layer of complexity.<\/p>\n<h2>How COVID-19 complicates earnest money<\/h2>\n<p>\u201cI have had buyers lose earnest money because of COVID-19. One buyer tested positive for COVID-19, so they signed a termination and walked away, leaving their deposit on the table. That was before the coronavirus addendum came into circulation,\u201d recalls Hartford, Connecticut-based, Move Safe Certified agent <a href=\"https:\/\/www.homelight.com\/agents\/amy-rio-ct-glastonbury\">Amy Rio<\/a>.<\/p>\n<p>If the buyer and seller cannot come to an agreement as to who gets to keep the earnest money in a sale derailed due to coronavirus, a court may have to decide.<\/p>\n<p>Rio shares a case where the buyer was furloughed during the transaction. The earnest money is now in litigation.<\/p>\n<p>\u201cI\u2019ve even seen loans fold the day before closing because the buyer\u2019s funding no longer meets the new criteria for COVID-19 funding,\u201d Rio says.<\/p>\n<p>But the outcome could depend on where you live.<\/p>\n<p>\u201cIn California, there is a bright line test that can help determine whether the seller has a right to retain the deposit, or whether the buyer has a right to a refund after a failed escrow. The test is whether the buyer has removed all of its contingencies,\u201d says <a href=\"https:\/\/schorr-law.com\/attorneys\/valerie-li\/\">Valerie H. Li<\/a>, a Los Angeles-based real estate attorney and a member of Schorr Law, APC.<\/p>\n<p>\u201cFor buyers and sellers waking up in the COVID-19 era in the middle of a deal, the buyer can refuse to remove a contingency and cancel a sale without penalty. Where the disputes are now arising are where all contingencies have already been removed, but the buyer wants to cancel and retain the earnest money deposit due to COVID-19.\u201d<\/p>\n<figure id=\"attachment_16574\" aria-describedby=\"caption-attachment-16574\" style=\"width: 700px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book.png\" target=\"_blank\"><img decoding=\"async\" width=\"666\" height=\"381\" src=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-666x381.png\" class=\"attachment-content size-content\" alt=\"Books that will show who keeps earnest money during coronavirus.\" srcset=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-666x381.png 666w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-64x37.png 64w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-128x73.png 128w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-192x110.png 192w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-432x247.png 432w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book-500x286.png 500w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-book.png 700w\" sizes=\"(max-width: 666px) 100vw, 666px\" \/><\/a><figcaption id=\"caption-attachment-16574\" class=\"wp-caption-text\"><\/a> Source: (I\u00f1aki del Olmo \/ Unsplash)<\/figcaption><\/figure>\n<h2>6 ways to determine who keeps the earnest money<\/h2>\n<p>Every home sale is unique, and so are the reasons for canceling a sale. Figuring out who should rightfully keep the earnest money in your case comes down to the answers to these six questions.<\/p>\n<h3>1. Did the real estate contract have a coronavirus addendum?<\/h3>\n<p>The three contingencies above are standard in most home sale contracts, however they don\u2019t specifically address the unusual issues arising in these unprecedented times. That\u2019s why many contracts are now including a <a href=\"https:\/\/www.homelight.com\/blog\/agent-coronavirus-clauses-real-estate-transactions\/\">coronavirus addendum<\/a>.<\/p>\n<p>\u201cThe COVID-19 addendum states that an automatic extension is granted if needed during the pandemic, as long as the need for the extension is not the fault of either party,\u201d explains Rio.<\/p>\n<p>\u201cIf the extension is simply because the financing or processing is taking longer due to new rules that have come into play, then the buyer is granted the automatic extension rather than put into default.\u201d<\/p>\n<p>Since many businesses are experiencing shutdowns and delays, and even essential services like real estate companies are operating with a skeleton crew, it\u2019s best for your own stress level to assume that it will take your home sale longer to close than normal:<\/p>\n<p>\u201cThe partial or full closures, or reduction in staff seen in local agencies, lending institutions, title companies, escrow companies, and the courts have impacted the timing for transactions,\u201d says Li.<\/p>\n<p>\u201cParties can expect obstructions and delays somewhere along the process that can really derail a purchase.\u201d<\/p>\n<h3><b>2. What were the terms of the addendum?<\/b><\/h3>\n<p>While there are no accepted national terms for a coronavirus addendum that applies across the nation, the terms set by Realtor associations in different states are quite similar. For example, Li explains the form currently in use in California:<\/p>\n<p>\u201cThe California Association of Realtors Coronavirus Addendum (<a href=\"https:\/\/schorr-law.com\/new-c-a-r-coronavirus-addendum-form\/\">C.A.R. Form CVA, 3\/20<\/a>) was prepared specifically to address the parties\u2019 rights and obligations \u2013\u2013 including a buyer\u2019s right to cancel with or without penalty. Terms may include those that postpone the sale by 30 days and allow the buyer to cancel at the end of the 30 days if escrow cannot be closed for any reason.\u201d<\/p>\n<p>In other words, the coronavirus addendum means it is never too late to renegotiate the purchase and sale agreement to allow for a fair outcome that takes into account a buyer\u2019s changed circumstances due to COVID-19.<\/p>\n<p>Florida Realtors have come up with a similar coronavirus addendum, however, as Meyer points out, the addendum is not automatically added to every COVID-19 era home sale contract. In addition, the addendum does not specifically mention what happens to the earnest money:<\/p>\n<p>\u201cThe addendum is not required and it does not address earnest money at all,\u201d says Meyer. \u201cIf a date is missed by the buyer, that is where the earnest money comes into play.<\/p>\n<p>\u201cHowever, the Florida Realtors coronavirus addendum allows for extensions of time for any aspect of the contract, such as a longer inspection period, or a longer mortgage contingency period, for either a set number of days or an open-ended time period \u2014 say, until the state of emergency declaration is terminated.\u201d<\/p>\n<h3><b>3. Is the buyer protected by other (non-coronavirus-related) contingencies?<\/b><\/h3>\n<p>A coronavirus addendum is specifically designed to address those contract-breaking issues that may arise due to COVID-19. However, buyers\u2019 rights to retain their earnest money are still protected by those standard contingencies. This is true even if the reason that the contingency comes into play is directly related to the pandemic.<\/p>\n<p>The economic uncertainty wrought by COVID-19 is most likely to trigger the loan contingency.<\/p>\n<p>\u201cI recently had a sale where the financing contingency came into play on the buyer\u2019s side because our buyer got laid off. Even though the job will be there when this is all over, the lender wouldn\u2019t approve financing because nobody has any idea when this will truly be over,\u201d recalls Spokane, Washington-based real estate agent <a href=\"https:\/\/www.homelight.com\/agents\/cambria-henry-wa-hl8845034\">Cambria Henry<\/a>.<\/p>\n<p>Job security isn\u2019t the only coronavirus-related reason that a buyer may walk away via the financing contingency. Since COVID-19 hit, the <a href=\"https:\/\/www.forbes.com\/advisor\/mortgages\/fha-loan-requirements\/\">requirements to get an FHA loan have become stricter<\/a>, meaning that even some pre-approved buyers may no longer qualify:<\/p>\n<p>\u201cFHA loan criteria has changed tremendously during the pandemic. Previously, a credit score of only 620 was required, and reserves were not required,\u201d explains agent Amy Rio.<\/p>\n<blockquote><p>\u201cBut now 80% of lenders are requiring a 680 credit score for an FHA loan, so a lot of buyers no longer qualify. I\u2019d say a solid 10% of my buyers no longer qualify to purchase a home with an FHA loan since COVID-19 began.\u201d<\/p><\/blockquote>\n<h3>4. The buyer has no protection from an addendum or contingency. Is the seller entitled to the money?<\/h3>\n<p>If there are no contingencies to justify backing out of a contract, it may be difficult for a buyer to retrieve their earnest money deposit. However, there is another standard clause that may impact the rights to the earnest money should a dispute arise between the buyer and seller: the <a href=\"https:\/\/www.americanbar.org\/groups\/litigation\/committees\/real-estate-condemnation-trust\/articles\/2020\/winter2020-coronavirus-force-majeure-clauses-real-estate-contracts\/\">force majeure clause<\/a>.<\/p>\n<p>Put simply, the force majeure clause is standard contract language that removes liability should the contract be broken due to natural, unexpected, and unavoidable catastrophes \u2014 say, if the seller\u2019s house is destroyed by a hurricane or tornado before the sale closes.<\/p>\n<p>However, it\u2019s still undecided whether the COVID-19 pandemic will be deemed as a natural disaster that legally triggers the force majeure clause.<\/p>\n<p>It\u2019ll take a court case to decide whether or not force majeure is applicable, but it\u2019s not worth getting into a legal battle if legal fees will cost you more than the total amount of earnest money.<\/p>\n<p>Meyer explains:<\/p>\n<p><b>\u201c<\/b>The force majeure clause in Florida contracts does not specifically state whether a pandemic\/epidemic is covered, so it is not clear if Covid-19-related cancellations are covered under the clause.<\/p>\n<p>\u201cFor most people, a $1,000 or $2,000 escrow may not be worth the court costs. However, a larger escrow deposit will change that. Sellers will need to see how much money is at risk and how much they are willing to spend on an attorney.\u201d<\/p>\n<p>The uncertainty of how courts may rule also holds true in California, as Li explains:<\/p>\n<p>\u201cAlthough some contracts have the force majeure provision that a buyer may use to get out of a purchase, there is no certainty that California courts will interpret the COVID-19 crisis as an \u2018act of God,\u2019 or some unforeseen and unpreventable event, that allows parties to completely withdraw from a contract without any penalty.<\/p>\n<p>\u201cEquity or fairness suggests there may be some relief available but unfortunately, there is no bright line test. This is going to be decided on a case by case basis by judges and juries.\u201d<\/p>\n<h3>5. Let\u2019s say, legally, you\u2019re entitled to the money. Should you take it? What\u2019s the right thing to do?<\/h3>\n<p>Unfortunately, there has currently been no ruling that spells out exactly how real estate contract disputes over earnest money should be handled during the COVID-19 pandemic.<\/p>\n<p>It could turn out that you (the seller) are legally entitled to the earnest money because the buyer no longer had any contingencies to turn to when COVID-19 negatively impacted their financial state. If that\u2019s the case, keeping the money might be legal, but it may not be morally right.<\/p>\n<p>\u201cLet\u2019s say someone is furloughed after a mortgage commitment was made, and there are no conditions left in the contract to give the buyer an out. In this situation, there&#8217;s harm done to both sides,\u201d says Rio.<\/p>\n<p>The seller is harmed because they\u2019ve had their house off the market and they\u2019ve still been carrying housing costs while in escrow. The buyer is harmed because they were furloughed or lost their job due to COVID-19 so they simply can no longer purchase the property.<\/p>\n<p>At that point, it\u2019s understandable for buyers to ask for their earnest money back, and it\u2019s also understandable that the sellers also expect to keep the money.<\/p>\n<p>It\u2019s a sad situation for both parties who are both suffering a loss. When it\u2019s not clear cut which party legally deserves to keep the earnest money, the right thing to do is to decide who gets the money based on which party is in more dire financial straits.<\/p>\n<h3>6. Is there anything a seller can do to protect themselves?<\/h3>\n<p>\u201cIt&#8217;s actually really difficult for a seller to keep earnest money,\u201d explains Henry.<\/p>\n<p>\u201cFor example, In Washington buyers don\u2019t have to be approved for a loan before making an offer on a house, as long as they apply for a loan within five days of the offer being accepted.<\/p>\n<p>\u201cIf their financing falls through, they get their earnest money back \u2014 unless the seller has used their right to terminate the financing contingency, which they can do after 30 days.\u201d<\/p>\n<p>In general, standard real estate contracts are written to protect the interests of both the buyer and the seller. Coronavirus addenda, on the other hand, tend to favor the buyer, because it extends those tight contingency timelines \u2014 often automatically \u2014 to grant the buyer more time to get an inspection, appraisal, and loan approval done.<\/p>\n<p>That addendum is sensible for both parties, because social distancing and stay-at-home orders have caused delays that make meeting those deadlines near impossible.<\/p>\n<p>However, it has also caused escrow periods to drag on longer than planned, which some sellers may not be able to afford. For example, maybe you are currently carrying two mortgages because you\u2019ve already purchased your new home.<\/p>\n<p>For sellers who are at all worried that they may not be able to keep up with expenses if the sale drags on for weeks longer than expected, your best option may be to ask your agent if skipping the coronavirus addendum will keep the escrow timeline on track.<\/p>\n<p>However, that may not be necessary. Many buyers who are walking away from a home sale due to coronavirus concerns, aren\u2019t even asking for the earnest money back:<\/p>\n<p>\u201cAs of now, most buyers are simply walking away from their deposit if they\u2019ve been furloughed or lost their jobs. Or they\u2019re asking for extensions to push the closing out for eight weeks, hoping they get rehired after the furlough,\u201d says agent Amy Rio.<\/p>\n<figure id=\"attachment_16571\" aria-describedby=\"caption-attachment-16571\" style=\"width: 700px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus.png\" target=\"_blank\"><img decoding=\"async\" width=\"666\" height=\"381\" src=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-666x381.png\" class=\"attachment-content size-content\" alt=\"Railroad tracks near a coronavirus house sale.\" srcset=\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-666x381.png 666w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-64x37.png 64w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-128x73.png 128w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-192x110.png 192w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-432x247.png 432w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus-500x286.png 500w, https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/when-can-seller-keep-earnest-money-coronavirus.png 700w\" sizes=\"(max-width: 666px) 100vw, 666px\" \/><\/a><figcaption id=\"caption-attachment-16571\" class=\"wp-caption-text\"><\/a> Source: (William Verhagen \/ Unsplash)<\/figcaption><\/figure>\n<h2>Keeping your sale on track<\/h2>\n<p>Many families are facing economic hardship right now, so it\u2019s only natural to wonder what will happen to the sizable earnest money deposit if your home sale falls through due to COVID-19.<\/p>\n<p>While it might seem smart to cut your losses and take that earnest money if you can get it, it\u2019s wiser in the long run to work out a way to keep your home sale on track.<\/p>\n<p>You never know what will happen to home prices in the future. If the economy doesn\u2019t recover swiftly after the COVID-19 pandemic passes, then <a href=\"https:\/\/www.globenewswire.com\/news-release\/2020\/04\/06\/2012015\/0\/en\/Veros-Predicts-Sharp-Decline-in-Home-Price-Appreciation-Rates-Due-to-COVID-19-Pandemic.html\">home prices may suffer<\/a>.<\/p>\n<p>If your buyer is open to staying in escrow for an extended amount of time in the hopes they\u2019ll re-qualify for a mortgage after the stay-at-home orders are lifted \u2014 and you can both afford to do so \u2014 then go for it.<\/p>\n<p>It\u2019s better to keep a serious buyer committed to purchasing your home than hope you\u2019ll get another offer down the road for the same amount once COVID-19 has subsided.<\/p>\n<p><em>Header Image Source: (omer shahzad \/ Unsplash)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When can sellers keep the earnest money from a real estate transaction \u2014 especially during the coronavirus era, with so many buyers backing out? <\/p>\n","protected":false},"author":37,"featured_media":16572,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"cybocfi_hide_featured_image":"","footnotes":""},"categories":[322,341],"tags":[712],"class_list":["post-16569","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-logistics","category-closing","tag-seller-covid"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.0 (Yoast SEO v27.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>When Can Sellers Keep Earnest Money Amid Coronavirus?<\/title>\n<meta name=\"description\" content=\"When can sellers keep the earnest money from a real estate transaction \u2014 especially during the coronavirus era, with so many buyers backing out?\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" 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