The Basics
Historically, earnest money symbolized the buyer’s good faith in entering a real estate contract. Why do we have earnest money? It provides for the Contract to Buy and Sell Real Estate.
A real estate contract is entered into when we remove the property from the market while the parties do their due diligence to complete the transaction. If the buyer terminates the purchase contract for reasons not provided in the Real Estate Purchase Contract, the buyer forfeits the earnest money to the seller.
The earnest money is credited to the buyer’s purchase price if the agreement closes. Upon signing a contract to buy and sell real estate, the buyer agrees to pay a designated amount of earnest money to an independent third party (usually the title company), who will hold the earnest money for both the seller and the buyer following the Contract’s terms.
Termination by Buyer
In most cases, the buyer must provide notice of the termination on or before a predetermined date if the buyer wishes to stop the Contract without forfeiting the earnest money, as specified in the Contract.
The earnest money holder can return the buyer’s funds if the buyer terminates following the Contract’s allowable circ*mstances. If the buyer terminates the Contract, but the termination does not comply with its terms.
An earnest money holder may disburse funds following the terms of the Contract, absent a dispute over earnest money. They are following the termination of the Contract or requesting mutual written instructions from the buyer and seller.
The Earnest Money Dispute
Sometimes, the buyer and seller differ on who should receive earnest money when a contract terminates. Upon determining, in its sole discretion, a dispute exists regarding earnest money. The earnest money holder has three options:
- If there is a legal action between the buyer and seller, hold the money and wait for it to settle; or
- File a lawsuit and deposit the funds with a competent court;
- Buyer and seller have received notice that Land Title may return earnest money if Land Title still needs to receive the summons and complaint with the lawsuit’s case number within 120 days.
Dispute Resolution
Even if it appears evident that one party is right and the other is wrong, the truth is that both parties are in the wrong. The earnest money holder cannot assist in resolving the dispute, as earnest money remains in trust for both parties.
The parties must mediate any dispute related to the Contract, and mediation could be a good way to resolve a genuine money dispute. Although earnest money is often low in residential transactions, mediation might need to make more financial sense. If that is the case, you may be better off seeking a resolution that both parties can agree upon with the other party.
The seller must act.
It is important to note that once there is a dispute over earnest money, there are no circ*mstances under which the seller can get back funds (even if the buyer is not entitled to them).
You need to negotiate informally or through mediation with the buyer if you represent the seller and believe your client has the right to the earnest money. In addition, you can get a court order ordering the earnest money holder to return the funds to the seller.
After 120 days, the earnest money holder will either notify the court of the withdrawal; the escrow holder will keep the funds, interplay with the court, or automatically return the money to the buyer. Taking action is the seller’s only option if the buyer disagrees with the seller regarding the funds.
An Expert Real Estate Attorney
Licensed real estate attorneys can assist you in determining what to do when you have an earnest money dispute and Who Holds the Escrow Money When a Dispute Occurs despiteLand Title’s eagerness to assist customers. Our ability has limitations once we resolve the earnest money dispute.
If you have any questions before engaging in an earnest money dispute, please do not hesitate to contact your local Land Title representative! Buyers have many options for backing out of purchase agreements without losing earnest money.
In the home purchase contract, many contingencies and deadlines will apply to ensure certain milestones occur. Once a deadline appears in the Contract, there is no requirement that either party is flexible about changing it.
The buyer and seller can negotiate these deadlines, and it’s important to consider the appropriate time to meet each deadline if the buyer submits timely, appropriate notice of intent to back out of the Contract within these deadlines. The buyer can back out without forfeiting the earnest money.
Inspection Contingency Allows Homebuyers an Out
An inspection contingency deadline, for example, is commonly where earnest money is compromised. Negotiate a date early enough in the Contract for all desired home inspections.
Inspection Contingency Allows Homebuyers an Out
Nearly always, a buyer can opt out by the deadline if, during those inspections, they discover something about the property that they cannot live with. Buyers who withdraw earnest money with timely and proper notice must promptly return it to the seller and move on to market the property to other potential buyers.
A seller may, however, keep the buyer’s earnest money if, after the deadline, the buyer discovers something about the house that is objectionable and cancels the Contract.
Buying a home is contingent upon financing and other factors.
Title review deadlines are deadlines for reviewing all property documents, and this is an important one-deadline for loan contingencies, among other deadlines on which earnest money is at stake.
The buyer’s earnest money typically becomes non-refundable after the loan contingency deadline. A loan contingency deadline is often the last “out” for the buyer when securing a loan because it can take a while. The seller will likely be able to retain the earnest money if a buyer buys the property after this deadline.
Earnest Money Refunds for Buyers
A title company, lawyer, bank, or broker may hold earnest money in escrow during the contract period. Generally, most U.S. jurisdictions need buyers to return the money they paid a buyer within 48 hours of terminating a contract when timely and proper.
To notify the escrow holder that the money needs to be released, the buyer should contact them.
Escrow holders will continue to hold earnest money until the dispute settles. If a dispute arises over whether or not the seller should receive the earnest money. For example, if the seller argues that the buyer did not notify them promptly of their intent to back out of the Contract.
In most cases, the escrow holder will keep the earnest money if there is even the slightest hint of a dispute to protect them from liability.
Earnest Money Dispute: What to Do First
A purchase contract is the first resource to refer to whenever a dispute arises regarding refunding earnest money. A contract or state law often requires that the parties undergo mediation or arbitration before anyone may bring a lawsuit to recover the money. Afterward, the parties will follow the terms of the Contract.
It is also important for the buyer and seller to inquire about what procedure is in place if a dispute arises with the entity or person that holds the earnest money. The escrow holder should provide a standard procedure or advice about the next steps. State laws specify how escrow holders must handle earnest money disputes. These laws must be familiar to the parties in a dispute.
Also, you should consult an attorney with a good track record of negotiating escrow money disputes. It probably will be in everyone’s interest to at least explore the possibility that there was a misunderstanding or a compromise could be reached—no one wants to go to court.
Remember that earnest money has a purpose for the other side, whether you are a buyer or seller in a dispute over earnest money: for the buyer, it is a sign of good faith and a way to secure the right to buy. The seller put forward the money to compensate the buyer by taking the property off the market for the buyer’s benefit.
If Court Is the Only Option to Resolve Earnest Money Disputes
Sometimes, the parties exhaust their pre-litigation options and must agree on how the earnest money should go. This will require the courts to resolve the matter. Small claims court, depending on your state’s criteria and monetary limits, may be an option for earnest money that is small enough.
A court of general jurisdiction can hear and resolve the matter. Still, it will likely take longer than expected, and neither the buyer nor the seller can access the earnest money funds during the process.
As a buyer, always give proper, timely notice of any intention to withdraw your offer if you plan to drop out of the deal. Suppose a buyer does not finish the purchase. You may permit earnest money if they breach the Contract’s terms.
What Does An Escrow Agent Do?
During closings, an escrow agent serves as a neutral third party and handles many responsibilities, such as:
- Searching for titles
- It would help if you asked the seller for a statement listing all the debt the buyer will take on.
- Maintaining the Contract’s contingencies.
- Document preparation and recording for the escrow.
- The funds are disbursed from the account of escrow.
If I Decide Not To Buy It? Will I Get My Earnest Money Back?
The decision to back out of the deal depends on your reasons. Most real estate contracts have certain contingencies that protect the buyer. If you back out due to one of these contingencies, you will receive a refund of your earnest money. A refund of your earnest money is possible if:
- Inspected home fails.
- It appraises for less than its sale price.
- Mortgages are not available to you.
- There are issues with the home’s title search.
It is possible that you won’t get your earnest money back if you:
- You need to meet the inspection and appraisal deadlines specified in the Contract.
- Suddenly, you change your mind.
Settlement of Disputes between Parties by Escrow Agents
When a buyer and seller sign a contract, an escrow account opens immediately. The Contract specifies the price and who will be receiving the funds. An escrow agent, usually an attorney or an expert of a title insurance company, accepts money from a buyer and its lender into an escrow account, then disburses the funds per the purchase contract.
Additionally, the escrow account ensures that all contractual items associated with the transaction are paid, such as loan fees, title insurance, deed transfer fees, and distributing funds to the seller.
Bottom Line
Upon completion of all agreement terms and the disbursem*nt of all funds, an escrow claims to have closed. It is the responsibility of the escrow agent to follow all escrow instructions provided by both the buyer and seller, as well as handle the loan paperwork and payments.
Among the agent’s responsibilities is making sure all the necessary payments are made to and from the escrow account and receiving all the necessary documents on time.
It is unlikely that an escrow agent is involved in creating the conflict that is the lawsuit’s subject. They are not vested in their earnest money deposit during a transaction or sale.
An escrow agent can recover the costs and attorneys’ fees by filing the interpleader action. The court will then decide whether the escrow money and documents will serve any purpose. As you proceed through this process, it is important to utilize the services and help of a knowledgeable attorney.
