What Happens to Earnest Money if Buyer Backs Out

What Happens to the Earnest Money If a Buyer Backs Out?

Every real estate transaction requires the buyer to submit an earnest money check at the outset of the sale, along with the signed purchase contract. This money demonstrates good faith on the buyer’s part, and the amount is usually determined by the seller. Its purpose is to provide the seller with some compensation in case the buyer ends up pulling out of the deal for any reason in which the seller is not at fault.

Here’s an overview from a real estate professional in Alpine of what could happen to earnest money if the buyer backs out of the purchase, as well as situations in which the buyer can retain his or her earnest money.

When canceling the agreement does not result in lost earnest money

All contracts for real estate purchases have deadlines for achieving certain milestones in the transaction process. These deadlines are subject to negotiation on the part of the seller and buyer. While these deadlines can be changed if both parties are willing to do so, there is nothing that says each party must be flexible, so it’s important to set these deadlines at realistic dates from the outset of the transaction.

Each of these deadlines gives the buyer a chance to back out of the contract without losing their earnest money as long as he or she provides appropriate notice of the intent to withdraw from the purchase.

One example is the inspection contingency deadline. The buyer must negotiate a deal that gives them enough time to complete all desired inspections. If, during the inspection, the buyer discovers an aspect of the property he or she simply cannot live with, the buyer will have the option to drop out before that deadline without forfeiting the cash. Note that this only applies before the deadline—if the buyer discovers something else about the house that makes them wary but this discovery occurs after the deadline, the seller will be able to keep the earnest money.

Another big example is the loan contingency deadline—the date by which the buyer must secure financing for the house. If this date passes without word from the buyer, the seller will be able to keep the earnest money, and at this point that money is nonrefundable.

Getting back your earnest money

If you’re the buyer in a real estate transaction and want to back out of the deal, it’s important to know how to get your earnest money back. Depending on the terms of your contract, that money could be held in escrow by a title company, broker, bank or attorney. The buyer should contact that escrow holder, apprise them of the situation and the need to release the money, and then check to see if any specific forms must be signed and submitted to get that earnest money back.

An experienced Alpine Realtor will work with you throughout your real estate transaction to ensure it goes as smoothly as possible. Contact Carpenter Real Estate today to learn more about how we can help.