Earnest money is an essential part of almost every real estate transaction. To show they are serious, buyers will deposit a sum of money into trust.
Typically, the seller sets the earnest money price, which is either a percentage of the purchase price or a flat sum. Earnest money can also cushion the blow if the buyer decides to step away from the deal as it covers some unforeseen expenses incurred by the seller.
But what happens to earnest money if the sale falls through? This happens more often than people might imagine. In earnest money disputes, it matters why the buyer has cancelled the contract.
A Buyer’s Chances to Get the Earnest Money Back
Real estate contracts are complicated and often include many milestones. For example, a buyer will want the home to be inspected before going through with the sale. If the inspection comes back unsatisfactory, then the buyer can call off the purchase if they provide appropriate notice.
These milestones are often contingencies—something must happen for the contract to be valid. Another contingency included in many real estate contracts is that the buyer sells their home. If they can’t, then they can cancel the purchase and get their earnest money back.
One question we receive is, “Do you lose earnest money if financing falls through?” Probably, as receiving financing is usually the final milestone included in home purchase contracts. If the buyer cannot get a mortgage, then they can cancel the contract and have their earnest money returned. But if they do secure financing, then the buyer usually can’t cancel the contract without losing their earnest money.
Retrieving the Money from Escrow
Earnest money is often deposited in escrow and should be returned within a short amount of time once a buyer drops out of the contract. To request the earnest money, contact the escrow holder for more information.
However, if there is a dispute about whether a buyer can get the earnest money, the escrow holder will keep it until the dispute is resolved. At that point, you will need an attorney’s help coming up with a plan for prevailing in your dispute.
How to Protect Yourself
Contract disputes crop up all the time, and many contracts contain dispute resolution clauses. For example, the buyer and seller might attend mediation or arbitration to resolve their differences. These dispute resolution techniques are often quicker than going to court and can frequently end the dispute.
You should also meet with an attorney. An experienced real estate dispute lawyer can reach out to the other side to resolve the dispute informally. Doing so will help everyone save money by avoiding court and all the expenses associated with a lawsuit. However, when a lot of money is at stake, a trip to the courthouse is often unavoidable.
Your Real Estate Contract Lawyer
Rachel Khirallah has been practicing in the real estate field for over a decade and has handled many earnest money disputes. If you have a question, or if you need help negotiating a resolution to a dispute, contact us today. We can swing into action to protect your rights. Call 214-302-0462 or send us an online message.
Rachel Khirallah
Rachel E. Khirallah is the founder of Khirallah, PLLC. She was admitted to the Texas Bar and U.S. District Court, Northern District of Texas in 2005 after graduating from Texas Tech University School of Law, and admitted to the U.S District Court, Eastern District of Texas in 2006.
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