A substantial amount of cash on hand is typically necessary to acquire residential real estate. Aspiring buyers must have enough money to cover a down payment that fulfills the requirements of their mortgage. They also need to have earnest money to deposit with their real estate agent when making offers on property. Earnest money can be as little as 1% of the proposed sale price or substantially more to help buyers stand out when the market is competitive.
If a transaction falls apart, when do the sellers who have listed their property get to keep the earnest money of potential buyers?
Contracts limit earnest money retention
The point of earnest money is to protect sellers from financial setbacks and delays triggered by buyers who walk away from transactions. In theory, the delay generated by a canceled closing could cost a seller thousands of dollars.
Earnest money represents the buyer’s sincere intent to purchase the property and serves as a form of protection for the financial exposure that comes from listing the property for sale. Buyers often protect their earnest money by including contingencies in their offers.
If they cancel the closing for a legitimate reason protected by contingencies, they can retain their earnest money. For example, an inspection contingency allows a buyer to cancel closing when an inspection uncovers significant defects the seller did not previously disclose. In scenarios not protected by contingencies included in the purchase agreement, the seller may have grounds to keep some or all of the earnest money initially deposited by the buyer.
Ensuring that real estate contracts extend appropriate protection is of the utmost importance for those preparing for a major sales and purchases. An attorney can help both buyers and sellers protect themselves by assisting with contract drafting and review during real estate transactions.