Q&A: Earnest Money
A recent search engine visitor asked:
Who gets to keep the earnest money a real estate deal falls through?
My answer: While I’ve talked in the past about the cost of a failed house deal, I’ve never really dealt directly with the issue of earnest money. In case you’re not aware, the whole point of earnest money, which a prospective buyer typically pays to the seller when they make an offer on a property, is to ensure that the buyer is serious, and intends to go through with the deal. Thus, if the buyer backs out of the deal, the seller gets to keep the earnest money. If the deal goes through, the funds are applied to the purchase at closing.
Of course, there are possible exceptions, like when the buyer makes their offer contingent on securing financing, the outcome of the home inspection, etc. But for the most part, if a deal falls through and it’s the buyer’s fault, the seller keeps the cash. Of course, the seller could also try to sue for ‘performance’ (i.e., to make the buyer honor the contract) but the most common thing to do is pocket the earnest money and put your house back on the market.
This is something to keep in mind when deciding whether or not to accept an offer on your home… If the prospective buyer offers a relatively small amount of earnest money, they might not be as serious as you had hoped. In that case it’s probably a good idea to ask for more in a counteroffer. Around here it seems that ~1% of the offer price is standard. From the seller’s perspective, more is always better (and vice versa for the buyer).
This article is part of my Money Q&A Series.
Modified on September 9th, 2007 - 16 Comments
Filed under: Money Q&A, Real Estate
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» Ten Days Until Closing» From the Archives (June 1st – June 7th)
» First (Lowball) Offer Received
» The Cost of a Failed House Deal
» Offer Made, Offer Received
» Counter Offer Made, Another Offer Received
» The Best of June 2007
» What a Threat Begets
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June 7th, 2007 at 8:08 am
We have this in the UK when you exchange contracts. You typically put down a 10% deposit and then if the buyer pulls the sellor can keep all this money.
If the completion of the sale is delayed for any reason, the party at fault has to pay interest to the other party.
June 7th, 2007 at 8:59 am
It took us about a year and a half to find our first home (which we bought a bit over a year ago) and we put in offers for a few houses before settling on the one we bought. One seller refused our earnest money and went for a better deal (which I assume fell through because I saw their house back on the market a few months later) and in another house we went under contract.
However, there were so many problems that we discovered during the inspection that we had no trouble getting the earnest money back. One of the biggest issues was the lack of a septic tank near the leech field; it had basically dissolved into the dirt. They refused to let us have a say in who repaired it and how the work was done before we moved in, and we weren’t willing to let them save money at our future expense so we backed out. I’m glad; the house we found has a much better commute. But we got our earnest money back and they didn’t even bother to try to challenge us.
We usually just offered a grand or $1200 when we put offers on the houses (~ .6 to .7%)
June 7th, 2007 at 10:59 am
Earnest money is pretty easy to get out of. Almost every contract with earnest money states that it is contingent on the inspection. An inspector is going to find something, and at that point the buyer can opt to back out. My parents tried to sell their house, and in the two offers they got, both times a very minor thing was found during the inspection (defects in a sink and a bathtub…neither one was really a dealbreaker), but this was during the big housing push in 05, so many buyers at that time were putting down earnest money on multiple homes to keep their options open. Once they found the one they wanted, they mentioned that a minor defect during the home inspection was a cause to back out.
It basically comes down to the seller accepting an offer not only based on price, but based on the buyer. Find a buyer that seems genuine and less of a hassle may be worth a slight cut in price.
June 7th, 2007 at 2:29 pm
I made sure to have some cash on hand as earnest money when I bought my first house. After looking at many houses, I finally found one worth making an offer on. This lady selling the house to me had 2 deals fall through on her, so I was willing to give her a good offer and two grand earnest money on the contract. Always make sure to have contingencies on the contract that if there is a problem with the home inspection, I could back out. Lucky for me (and her) there were no major problems with the house and the deal went through. I don’t think I would ever consider an offer that did not have at least 1% up front as earnest money that the buyer is serious. It takes money to buy a house and if the buyer doesn’t have anything, that’s a red flag right there.
June 7th, 2007 at 4:19 pm
I recently found your blog. Don’t ask me how. My wife and I had 2 different buyers default when we sold our first house. The first was a young guy that did not show at closing and the other was more interesting. He was an engineer at a past employer of mine. They all vouched for him as a good guy. That is until he skipped town just before closing and they found out he was not an engineer after all. In both cases, we split the $1000 earnest money with the realtor. We asked and got what worked out to be 2% on our last house. Needless to say, it closed.
June 13th, 2007 at 11:05 pm
Is it standard to split the earnest money with one’s agent if the deal falls through (Buyer’s fault)? I am looking through the contract our selling agent gave us for our house…I am trying to make sure our agent is within line to put this in the contract.
June 14th, 2007 at 8:29 am
Monica, that’s a great question and I don’t honestly know the answer. Hopefully someone else does.
I’ve always assumed that if the deal falls through, the earnest money would belong to the seller, not split 50/50 between seller and agent. However, I may well be wrong.
June 14th, 2007 at 8:34 am
I should also add here that anything like this is almost certainly negotiable. If the contract says earnest money is to be split and you don’t like it, tell you agent concession on their part in order to get your business. This would actually be a relatively small concession on their part to get your business.
June 21st, 2007 at 11:40 pm
I was trying to purchase a home but was unable to obtain financing. The decision was a long time coming as the bank stated they were swamped in the underwriting department. So, an addmendum was done on the contract twice. Now, the seller does not want to return the full amount of money because they feel they have kept the house of the market for too long. I do understand their frustration, but I did not anticipate not getting the loan…I was preapproved, I paid $300 inspection. I was sure I was going to get the loan (but due to a divorce, it was a major negative on my credit report from my ex, which FHA will not approve until 3 years have passed. December 15 will be 3 years). Does the seller have that right to keep 1/2 of the money? What are my rights and should I get an attorney. I know that $250 is not a huge amount, but I feel I have lost more than the seller as I am out the inspection money.
June 22nd, 2007 at 8:38 am
Elise, that probably depends on the wording of the contract.
July 19th, 2008 at 1:22 pm
What’s your opinion of a real estate purchase contract which has a sentece in the Default section that says:
“If buyer defaults and earnest money is forfeited Broker(s) may request and seller will agree to pay the Broker(s) one-half of the earnest money, with amount not to exceed the copmiisiion agreed to in the seller’s property listing agreement.
July 27th, 2008 at 9:44 am
Is there a way to protect yourself if you are interested in purchase property adjacent to yours? We have tried to contact the owner several times and have not gotten any responce. We truely want to purchase the property but are up in arms how to go about it. Thus our question is if the owner choises to sell, is there a way we can be notified upon an offer for the property?
May 28th, 2009 at 1:21 am
My wife and I decided to purchase a new manufactured home/land package last October 2008. We were asked to put $3000 down as earnest money. Promises were made and broken by the seller and his agent. The closing date on the contract was March 31, 2009 and it is now the end of May! No house on the property as of yet. We decided that this whole thing was taking too long and asked to get out of the deal. They kept our money and we will probably have to get a lawyer to fight for it. It really sucks!
The point is that it is not always the buyers fault…..
August 20th, 2009 at 9:46 am
Great information and follow-up about earnest money!
August 21st, 2009 at 12:51 pm
It turned out that we went to a lawyer, he mailed and called the seller and the title company and demanded they give us back the money. The seller and the realtor argued about it. We were being forced to take legal action but decided that we would allow the seller to keep half of the $3000. He did and we lost $1500! I wonder if this guy does this for a living? He could do this with several other buyers and make all kinds of money off of them!
August 29th, 2009 at 6:24 pm
Hi,
I have a question about how to recover earnest money that was never given to us (the sellers) when a deal fell through from the Realtor. They told us they put it into a account but we never got it. It has been over 13 years ago. We recently received a letter from one of those search and recovery companies saying we had a certain amount in a government agency we need to claim. The amount was the amount of the Earnest money on this real estate deal. How do I go about finding out what agency holds such monies? I do not think I should have to pay someone to get my money back.