A real estate deal may fall apart for many reasons. Your financing may fail, an inspection may uncover serious repairs or the seller may decide not to complete the sale. When this happens, you will likely focus on one question first: Will you get your earnest money deposit back?
The answer will usually depend on the purchase contract and the steps you and the seller took before the transaction ended. Because earnest money disputes may become stressful and expensive, it helps to know how these deposits work before you sign an agreement.
What earnest money does in a real estate transaction
Earnest money is a deposit you will usually provide after a seller accepts your offer. The deposit shows you intend to complete the purchase in good faith. Several factors may affect how earnest money works in your transaction:
- Defining the amount of your deposit
- Setting financing and inspection contingencies
- Establishing cancellation deadlines
- Identifying where escrow funds will remain
- Determining whether the property is residential or commercial
In many transactions, the earnest money will remain with a title company or escrow company until closing. If the sale closes, the funds will usually apply toward your purchase costs.
When you may receive your earnest money back
Real estate contracts usually include contingencies that protect buyers during certain stages of the transaction. If you cancel the deal within the allowed time and follow the contract terms, you may recover your earnest money deposit.
Financing problems, appraisal issues and inspection concerns may affect whether you receive the deposit back. Timing also matters. Missing a notice deadline or failing to follow the contract requirements may create problems later.
When you could lose the earnest money deposit
In some situations, the seller may have the right to claim your earnest money deposit. This may happen if you back out of the transaction without a valid contractual reason or fail to meet important deadlines.
The outcome will depend heavily on the language of the agreement and the facts surrounding the failed transaction. The law does not automatically award the deposit to one side simply because the deal ended.
Why earnest money disputes become complicated
Earnest money disputes may become complicated when buyers and sellers interpret the contract differently. In some cases, the escrow company may continue holding the funds until both parties reach an agreement.
Disagreements about deadlines, contingencies or cancellation notices may affect whether you recover your deposit. Because each transaction depends on the contract language and the facts surrounding the sale, the outcome may look very different from one deal to another.
