Earnest Deposit
Recovering your earnest money deposit when a deal falls through
Deciding to purchase a home can be an exciting process, but buyers are also likely to be nervous about the financial commitment. There are a number of costs at the outset, such as the home inspection. And if the deal falls through, you'll be left with a smaller bank account and no new home.
The earnest money deposit can be of particular concern to buyers. This initial sum signals that the buyer is serious about purchasing the home, not just locking it down while considering multiple properties. If the transaction doesn't go through, the earnest deposit can be retained by the seller as compensation for having to re-list their home. If the deal is successful, the earnest money deposit is released and included as part of the down payment.
The earnest money deposit can easily require you to contribute several thousand dollars toward the purchase. Beth Braverman, writing for the National Association of Realtors, says this deposit is usual equal to 1 percent of the purchase price. However, buyers might be advised to make a larger deposit, especially in competitive markets where multiple offers are more common.
If the purchase does not go forward, a buyer will naturally be interested in retaining the earnest money deposit. Under some circumstances, this is not possible; you'll simply have to forfeit this cash. In other scenarios, where the failure of the purchase is not the fault of the buyer, you can get this deposit back.
CONTINGENCIES
You're most likely to get the earnest money deposit back if your offer includes a number of contingencies. Craig Dinofrio, also writing for the National Association of Realtors, says one such contingency stipulates that the purchase is dependent on the appraisal. If a lender determines that the home is worth less than the purchase price, the contingency allows the buyer to back out of the deal and recover their deposit. Of course, the buyer and seller can also renegotiate the purchase based on this information; for example, the seller might offer to lower the price to the appraised value.
Buyers are always encouraged to get the property inspected before finalizing the purchase. The home inspection contingency allows you to recover your money if an inspector finds a major problem that has not been disclosed by the seller.
A financing contingency says the buyer will only commit to purchasing the home if a lender approves them for a mortgage. This stipulation does not let you walk away with your deposit if you are dissatisfied with the financing options that are available. Rather, a lender needs to decline your application in order for the contingency to be applicable.
Some buyers may want to sell their current home before they commit to buying a new one. This contingency sets a certain date by which you'd like to get an offer or complete the sale. If your home is still on the market at this point, you can withdraw your offer and recover your deposit.
The buyer also has the option of backing out of a deal and taking back their earnest money deposit if the property's condition is not acceptable. For newly constructed homes, the buyer may opt not to see the deal through if the builder has not finished construction or if the home has noticeable flaws. Buyers can also decide to cancel the transaction and get their money back if a home is damaged before closing.
Finally, you can get your money back if the seller decides not to go through with the sale. If for any reason a seller changes their mind and decides that they do not want to accept your offer, the earnest money deposit must be returned to you.
LOSING THE MONEY
While there are several ways a buyer can recover their earnest money deposit during the purchase process, this option is not always available. In some circumstances, you'll lose the money unless you complete the purchase.
If the reason for the cancellation of a transaction is not covered by a contingency, the earnest money deposit is forfeited to the seller. Braverman says buyers may decide to forego some contingencies in order to be more competitive; for example, you might drop the financing contingency so your offer is better suited to compete with an all-cash offer. While your deposit should be returned if the seller decides to go with another offer, you won't be able to get it back if you've waived the financing contingency and are subsequently turned down for a mortgage.
Several deadlines will be set up during the purchase process, and you'll want to make sure you don't miss any of them. Ann O'Connell, writing for the legal site Nolo, says buyers can withdraw their offer and get their money back if they inform the seller of their decision by these dates. If your decision occurs after the deadline—for example, notifying the seller that you are pulling out because of an issue uncovered by the inspection, but not doing so until after the inspection deadline—the seller can keep your deposit.
Your earnest money deposit may be considered non-refundable, or this might be the case at certain points during the process. Dinofrio says you should review your contract to see if there are any conditions related to the deposit.
You will also need to part with your earnest money deposit if you simply decide you do not want to go through with the purchase. If there is no problem with the financing or property, but you get cold feet or find another home you prefer, the deposit is forfeited to compensate the seller for the time their home was off the market.
THE RECOVERY PROCESS
In some cases, both the buyer and seller may agree to the return of the earnest money deposit. However, it is also possible that this money will be contested.
Make sure you understand the contract and contingencies, and keep a calendar of any deadlines in the process. Michele Lerner, also writing for the National Association of Realtors, says you should make sure that the deposit is not made directly to the seller. It should be held in escrow by a neutral party.
If you decide to rescind your offer, you should inform the seller promptly. O'Connell says the buyer needs to provide proper notice to the seller by the deadline and inform them of the reason for their decision.
You'll need to fill out some paperwork to ensure that all parties agree to the cancellation of the contract and the disbursement of the earnest money deposit. This form instructs the escrow holder to release the funds once the agreement has been signed by all parties in the transaction.
Either the buyer or seller can dispute the release of the earnest money deposit. The seller might claim that the buyer did not inform them in a timely matter, or they might contest the conditions of a contingency. If there is any question of who should receive the deposit, it will continue to be held in escrow until the matter is resolved.
If a dispute arises, consult with an attorney to determine how to proceed. You may be able to reach a compromise with the seller, or you may have to take the issue to a small claims court or file a lawsuit.