If you have ever purchased real estate you probably recall putting up money with your offer to purchase. In Texas, we call it earnest money. In some states, it’s referred to as a deposit. Real estate lingo varies from state to state. The word earnest essentially implies sincerity. If an individual is serious about buying a piece of property, he will put up at-risk money to show that he is serious. If he is in breach of his contract to buy a piece of property, he will usually lose his earnest money.
Notwithstanding the risks involved, there are many circumstances that may arise that will allow a person to not go forward with the purchase and still get his earnest money back. Many contracts will have contingency clauses that will state that the buyer has the right to get his earnest money if certain events take place. For example, if the buyer is obtaining financing, the contract will state that, if the bank is unwilling to make the loan, the buyer can terminate the contract and get his earnest money back. Loans can be denied for several reasons. The buyer may have bad credit; the buyer may not have enough money to put down; the buyer may not have sufficient income; the buyer may have too much debt. Lenders typically have the property being bought appraised. If the appraisal turns out giving a value that is less than the contract price, the bank will not approve the loan. All of those circumstances are grounds for terminating the contract and having the earnest money returned. Under the low appraisal circumstance, the buyer will sometimes come up with extra money to put down to make up the difference between the purchase price and the appraised value. Sometimes the seller will agree to lower the price so that the sale can go through. On rare occasions, a seller may refuse to allow the earnest money to be returned to the buyer. Under that scenario, the buyer may have to write a demand letter to the title company stating that the money is to be returned to him. The title company then has to advise the seller that it has received a demand for the money. If the seller still refuses the title company will send the money to the court registry. At that point, any attempt to obtain the money will require a civil suit. If the seller does not respond to the title company’s letter within two weeks, the title company is then authorized, under the terms of the earnest money contract, to return the money to the buyer.
One quick point. Legally earnest money is not required to be put up if the buyer does not wish to. However, as a seller, if someone brought me a contract that does not stipulate earnest money, I would be very suspicious of the buyer. I personally have no recollection of dealing with a contract that did not stipulate earnest money.
When can a buyer forfeit his earnest money? That’s a fairly easy answer. If all buyer contingencies have been satisfied and the buyer elects to not go forward with the purchase, he will lose his earnest money, and the money will go to the seller. A seller could, under most circumstances, sue (for specific performance) the buyer to make him go forward with the purchase. In most cases, such action would be a waste of time because the buyer would probably be incapable of performing and the seller would be out money.
Bottom line: Virtually all contracts should have a provision for earnest money.
Mike McEwen is a real estate broker with 29 years in the business.