Once a buyer and seller sign a purchase agreement or sales contract, the buyer makes an upfront deposit, known as earnest money. The funds are delivered to an escrow account, not directly to the seller. That account is maintained by either a real estate attorney, a title company, or a real estate agent or broker, and it serves as a neutral third party in the transaction. “What is escrow<\/a>,” you may wonder? Escrow, which acts as a secure holding place, helps ensure a fair and transparent exchange between the parties involved. Earnest money deposits are delivered via personal check, certified check, or wire transfer to the escrow company, which helps protect both the buyer and seller throughout the process.<\/p>\n\n\n\n The earnest money deposit doesn\u2019t guarantee that the purchase will happen or obligate the buyer to pay the sale price. It does require the selling party to take the property off the open market for a set period of time, allowing the buyer to secure financing and conduct a property appraisal and inspection. If the deal does proceed to closing, then the earnest money deposit is applied to the buyer\u2019s portion of the down payment and closing costs as funds allow.<\/p>\n\n\n\n The purchase contract will have specific language regarding the terms and the time frame that the earnest money deposit \u2014 and the contract itself \u2014 is valid. These terms benefit both the seller and the buyer. Typical language in a home purchase agreement or sales contract will include: <\/p>\n\n\n\n This good faith deposit can range from 1% to 5% of the sales price. However, real estate investors or buyers in hot real estate markets<\/a> sometimes offer larger earnest money amounts. This can help give them an edge in a competitive purchasing situation. <\/p>\n\n\n\n Earnest money deposits can help you rise to the top of the pack in an active market. But do not put down money until you\u2019re sure that it\u2019s the property and price you want<\/a>. The whole process of earnest money or \u201cgood faith money\u201d is all about that \u201cgood faith.\u201d If you don\u2019t secure financing, sellers can keep the money and sell the house to somebody else. As long as you buy the house or reach an agreement during due diligence, it\u2019s not extra money going to the seller. It\u2019s just an upfront deposit.<\/p>\n\n\n\n When you wire money, make sure to call the title company to confirm the wire instructions. Wire fraud is common! Additionally, make sure to save the acknowledgment of receipt.<\/p>\n\n\n\n Deposits can be returned to the buyer if:<\/p>\n\n\n\n Earnest money deposits can remain to the seller and not be refunded if:<\/p>\n\n\n\n Contingencies that can affect earnest money<\/a> refunds include:<\/p>\n\n\n\n A home inspection that turns up major issues or indicates a property may need extensive repairs can be a reason for a buyer to back out of a deal. If they can show that a home inspection demonstrates problems, they can submit a notice to the seller that they don\u2019t want to move forward with the purchase. In this case, the earnest money is returned. The home inspection contingency is an important one that shouldn\u2019t be overlooked.<\/p>\n\n\n\n If a property is appraised at a lower value than its selling price, the buyer and seller will have to negotiate<\/a> a new price. The two parties will need to agree or back away from the deal. Walking away in this instance would not require losing earnest money, and the deposit should be returned.<\/p>\n\n\n\n Buyers who are unable to secure financing can get out of a real estate deal if there\u2019s a financing contingency in the contract. Typically, a buyer must submit in writing that they were unable to obtain financing within a certain time frame to get their earnest money deposit back.<\/p>\n\n\n\n When buying a property, it\u2019s important to do a title search to ensure you can legally purchase it and that no one else has a lien on it. A clean title contingency would allow a buyer to get their good faith money back if the property\u2019s title comes back with any liens.<\/p>\n\n\n\n Some real estate contracts<\/a> may have a selling contingency. This allows a buyer to walk away from a deal if they\u2019re unable to sell their home or another property they might need to unload before moving forward with the purchase. A selling contingency lets a buyer get their earnest money back.<\/p>\n\n\n\n Let\u2019s look at two examples of earnest money \u2014 one that gets a refund and one that doesn\u2019t \u2014 to get a better understanding of how it works:<\/p>\n\n\n\n Refund example:<\/strong> Eric has put good faith money down to buy a home in another state where he\u2019ll be moving soon. During the home\u2019s appraisal, Eric finds out that the home he wanted to purchase for $250,000 is only appraised at $200,000. He attempts to negotiate with the seller, but they don\u2019t agree with the appraisal and don\u2019t want to take less. Eric is entitled to walk away from the deal and receive his good faith money deposit back in full.<\/p>\n\n\n\n No refund example:<\/strong> Jill\u2019s rental agreement is up next month and she\u2019s found a place she can buy for a similar mortgage payment to the rent she\u2019s used to paying. To get the seller to take the property off the market, Jill provides an earnest money deposit. After discussing her upcoming move with her current landlord, she finds out that they are willing to keep her rent the same for the next year if she will stay.<\/p>\n\n\n\n Jill decides she doesn\u2019t want to deal with the hassle of moving, so she backs out of the real estate deal. In this case, Jill won\u2019t get her earnest money back because she\u2019s not going through with the deal due to issues with the property but for circumstances in her own life that have changed.<\/p>\n\n\n\n In the event of any dispute between the seller and buyer over a failed deal, the earnest money deposit will be held in escrow until the dispute is settled. In most U.S. states, arbitration or mediation will be the necessary first step to settle any dispute, with the purchase agreement or sales contract being the core document of evidence. That means that experiencing a change of heart or a change in circumstances simply isn\u2019t suitable evidence for returning the deposit. State laws also dictate how the escrow company \u2014 always a neutral third party \u2014 must handle the process of participating in dispute resolution.<\/p>\n\n\n\n During this time, the earnest money deposit is earning interest in the trust account where the monies are held. If interest accrues in the escrow account in an amount over $5,000, whichever party is due the earnest money will need to file Form W-9 with the IRS to obtain the accrued interest.<\/p>\n\n\n\n If a dispute cannot be settled through arbitration, the matter will go to small claims court (for smaller earnest money deposits) or a general jurisdiction civil court. Going all the way to court is rarely seen in practice, as the expenses and time spent will generally outweigh the benefit to either party.<\/p>\n\n\n\n To receive earnest money back<\/a> on a real estate deal, you must comply with the contingencies in the contract. A buyer who gets cold feet and simply decides they don\u2019t want to go through with a deal won\u2019t get their earnest money back. <\/p>\n\n\n\n Additionally, you can lose earnest money if you fail to meet the timelines in the contract. For example, if the home inspection contingency states that you have 10 days from the time of the home inspection to back out of the deal but you wait 14 days from the time of the home inspection, it is unlikely you will get your earnest money back.<\/p>\n\n\n\n Make sure you fully understand your real estate contract before you put earnest money down<\/a>. This prevents any misunderstandings about the money later.<\/p>\n\n\n\n When it comes to real estate, falling through on a deal isn\u2019t something anyone wants, but unfortunately, it does happen. So who keeps the earnest money when a real estate deal falls through? The answer to this question depends on the language of the contract between the buyer and seller, as well as the reason for the agreement not going through.<\/p>\n\n\n\n The earnest money deposit is given by a buyer to a seller that serves as evidence of good faith while in a real estate transaction. It is typically held in an escrow account by the title company, an attorney, or other third parties who is not involved in the transaction.<\/p>\n\n\n\n The most common reason for a real estate deal to fall through is that the buyer is no longer able to purchase the property. In this case, the earnest money may be refunded to the buyer. If the buyer is in breach of the contract, the earnest money may be forfeited.<\/p>\n\n\n\n If the seller is the one who is in breach, the earnest money may be refunded to the buyer, depending on the state\u2019s laws. In some states, the buyer has the right to sue the seller for damages due to the breach. <\/p>\n\n\n\n On the other hand, if the deal falls through due to a mutual agreement between the buyer and seller, the earnest money could be split between the two, or the deposit may remain in the hands of the third-party escrow holder.<\/p>\n\n\n\n While there are benefits to putting an earnest money deposit down on a property you\u2019re looking to buy, you need to ensure you take steps to protect your money<\/a>. You can take these precautions if you want to get your earnest money back if a deal falls through:<\/p>\n\n\n\n If you\u2019re considering making an earnest money deposit<\/a> on a property, read these articles to learn more about how it works:<\/p>\n\n\n\n Home Purchase Fall Through? Don\u2019t Panic: Here\u2019s How to Get Your Earnest Money Back<\/a><\/p>\n\n\n\n An Investor Answers: As a Wholesaler, Should I Put an Earnest Money Deposit Down?<\/a><\/p>\n\n\n\n\n
How much earnest money should I put down? <\/h3>\n\n\n\n
When do you put down earnest money?<\/h3>\n\n\n\n
When can my earnest money deposit be refunded? <\/h2>\n\n\n\n
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Home inspection contingency<\/h3>\n\n\n\n
Appraisal Contingency<\/h3>\n\n\n\n
Financing contingency<\/h3>\n\n\n\n
Clean title contingency<\/h3>\n\n\n\n
Selling contingency<\/h3>\n\n\n\n
Example of Earnest Money<\/h2>\n\n\n\n
What Happens if There\u2019s a Dispute? <\/h2>\n\n\n\n
How Do You Lose Earnest Money <\/h2>\n\n\n\n
Who Keeps Earnest Money if a Deal Falls Through <\/h2>\n\n\n\n
How To Protect Your Earnest Money Deposit<\/h2>\n\n\n\n
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Learn More About Earnest Money<\/h2>\n\n\n\n