Earnest money is usually expected when a buyer puts an offer on a home. The money shows that the buyer is willing to put down a deposit to back up the offer and isn’t wasting a seller’s time. But home transactions can fall apart for a variety of reasons. Most buyers assume they’ll get their earnest money returned if the deal doesn’t go through. Will they? The real answer lies within how the contract is worded.
Because the return of earnest money is not guaranteed in all situations of termination, buyers should ask their Realtor the following questions:
∙ Where does the contract stipulate my ability to terminate?
∙ What happens to my earnest money if I terminate?
∙ What happens to my earnest money if the seller terminates?
∙ How is earnest money released?
Standard purchase contracts normally provide all of the above answers, but the language can be confusing. Buyers should always read and understand what they’re signing. Ask your Realtor to clarify anything that doesn’t make sense.
How is Earnest Money Released?
Ohio law says the following about earnest money in a real estate transaction (which is included in the Cincinnati/Dayton area standard purchase contract form):
1) Earnest money goes toward the purchase of the home upon the closing of the property.
2) In the event that one party fails or refuses to perform the duties of the contract, or contingencies are not met or waived (i.e., the transaction does not go through), the release of earnest money must be a mutual agreement and disbursed through a “Release” form signed by all parties.
3) In the event of a dispute, the money remains in a broker trust account until written instructions are received, signed by both parties, or by court order.
4) If provided in the contract, within two years of deposit in the broker’s account, the funds will be returned to the buyer, without further notice to the seller, unless there is pending legal action.
In What Cases Is Earnest Money Returned?
Usually earnest money is readily returned in the following instances when standard contracts state such:
∙ The buyer’s financing fell through and the contract was terminated.
∙ The buyer followed the timelines for inspection and terminated the contract based on problematic findings.
∙ The seller backed out and decided not to sell.
In What Cases Is Earnest Money Forfeited?
On the flip side, a buyer is likely to lose earnest money in these instances:
∙ The buyer missed deadlines to perform certain duties in the contract (like getting an inspection).
∙ The buyer agreed to a nonrefundable deposit.
∙ The buyer waived the important inspection contingency and wants to terminate after discovering defects in the home.
Many kinds of issues can arise when a real estate transaction falls through and earnest money can get caught in the middle. One extra step a buyer can take to protect his deposit is to include language in the contract such as:
“Should Buyer terminate Contract as provided by Contract, Seller agrees to release Earnest Money to Buyer by written release within three days of receipt of Buyer’s written Notice of Termination to Seller.”
As always in real estate, if you want legal representation, consult a real estate attorney.
Real Estate Term of the Week
Notice of Termination of the Contract to Purchase: A legally binding document used to facilitate notification that a party to a purchase contract is exercising their right to terminate the contract, pursuant to a specific contingency that is provided within the terms of the contract.