When can buyer lose earnest money?

Question

All mighty BP experts,

Under what circumstances, would a Buyer lose his earnest money if a transaction fails?  Thanks in advance.

Background:

I'm in the middle of negotiation.  Seller is asking for serious earnest money (10% of purchase price).  Seller also asks that two weeks after contract acceptance (before closing, which we have 45 days), earnest money to be immediately turned over to the seller by the title company.

Account Closed · Answer

@Albert Du The seller asking for earnest funds be sent to him pre-closing is not the norm (at least not in Florida). Typically the buyers title agent or realtor hold escrow until closing.

To answer your question you typically have two "outs" in the sales contract. First being the inspection period which can range from 5-15 days. Once that expires and if you are financing you will have the financing contingency which is typically 30 days. Should you receive a loan commitment then decide not to close or be unable to close your earnest money could be in jeopardy should the seller choose to go after it.

Laura Renner · Answer

Albert D. this situation is why I recommend buyers be represented by an experienced Buyers Agent. Regardless, I agree with others above, don't agree to dispersing of your deposit until closing.  Once you pull your inspection contingency either by it expiring or signing a release of the contingency, you are at risk of losing your deposit if you fail to close.  Don't rely on a financing contingency to back out. The seller could dispute that you did not close in good faith and win your deposit after all. So stick with the timeframe of your inspection period.   Myself personally in my deals and my clients, If we don't get what we want under our terms that serve best for the investment value with as little risk as possible...it's not a deal. Most sellers don't want to lose a buyer, time or effort.

Oren K. · Answer

Albert - Think about the following situation; A mechanical or some other type of lien is put against the property just before closing. The Seller does not agree to clear the lien prior to closing. They have some of your money and now you either have to close and deal with the lien or walk away from your funds. Suing them after the fact is good money after bad.

Also, unless (and even if) it is a SFR, 2 weeks is generally not enough time to do DD, arrange financing and get to the closing table. If you have done this dozens of time and have all your ducks (inspectors, reports, financing, legals, title, etc)  lined up in advance, OK. Otherwise, they are making an unreasonable request / demand.

Good luck.

Shannon Wright · Answer

I would want to know why the seller is asking this...a pre-release of funds is not normal and such an aggressive position usually has a reason. If you can find out the motivation, it might help find a more amicable solution than giving all the buyer's EMD away. It is a red flag in Ca.

Jean Bolger · Answer

I would not allow any transfer of funds from the title co before the closing.

If they want to ask that all contingency deadlines be within two weeks, and you are OK with that then fine (but if you are using traditional financing that's going to be almost impossible, I'd think - and what if your financing doesn't come through?). But don't let them have the money until you get the property- that's the whole point of escrow.

Chris Mason · Answer

Normally, in most states, you lose it if you remove all contingencies and then fail to close (job loss, cold feet, feel that the house is haunted, etc).

In this case, your seller is negotiating for a one-off non-standard thing and it will be whatever is specified in your specific contract.

Albert D. · Answer

Account Closed

Thanks Nick.  Very helpful.  Seller being aggressive in my opinion.  :)

Albert D. · Answer

Oren K.

Great advice.  It is pretty clear to me know that this is too much an ask from the seller.  I'll stay with my terms as close as possible.  Thank you both.

Account Closed · Answer

Hi Albert

In many if not most RPAs (Residential Purchase Agreements) there are active and passive clauses that speak to when contingencies have been met. As a buyer you are certainly within your rights to request that the EMD money not go hard (nonrefundable) until the end of escrow. If you are dealing with a Distressed, Motivated, Flexible (DMF) seller, of an off-market property, all he probably really wants is to get escrow closed to get out from under the problems he has ASAP. If the seller objects to the EMD staying soft, he may not be a DMF seller after all and is just looking to swallow your deposit money.

Hope this helps

Albert D. · Answer

Chris Mason

So before all contingencies are met, Seller cannot and should not get my earnest money if deal fails due to one of the contingencies not satisfied, right?  Then I'd think it is unreasonable to ask title company to transfer earnest to seller in two weeks after contract acceptance.  Seller should wait for all contingencies satisfied, then asks for earnest transfer, correct?  Thanks a lot.

When can buyer lose earnest money?

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