Release of earnest money in Texas is usually straightforward: the buyer either walks away during the option period and gets their earnest money back, or the deal goes through, they get the house, and the earnest money is credited to them at closing. However, there are times when it’s more complicated and difficult than that. Here’s a guide to walk you through the process of helping your buyer get their earnest money back. (As always, remember to consult a trusted real estate attorney if you’re ever in doubt or have questions!)
What’s at Stake for Buyers
“In Killeen, typical earnest money amounts range from $500 to 1% of the purchase price. In hotter markets lie Austin and its suburbs, earnest money amounts of $5,000 and more are not uncommon,” Brian Adams, Realtor at StarPointe Realty said. Because earnest money deposits can be so costly, it can be tough for the buyer to part with the money.
If a buyer’s got their heart set on a home only to find that the inspection report revealed structural issues, that can be especially difficult for the buyer. “The structural inspection contingency allows buyers to re-evaluate their situation should ‘a single defect that would reasonably cost in excess of $1,500 to remedy’ be found. A laundry list of small items adding up to $1,500 does not qualify,” said Maria Barr, a Realtor. Even if there’s a contingency in place, the buyer may struggle with the decision. Perhaps they will even want to negotiate a lower price with the seller, which is in their full purview to do. No matter how amicable the buyer tries to be, it takes two to tango. If the seller doesn’t agree to release the earnest money to the buyer, there are steps you can take. Let’s start by talking about what to avoid doing.
What to Avoid
Under no circumstances should you, as a buyer’s agent, give legal advice to your buyer. That responsibility rests solely on real estate attorneys. According to Marcus Brown Properties, “Real estate agents cannot explain potential legal outcomes of any dispute or lawsuit, they cannot evaluate legal issues and advise the client, they cannot file a lawsuit for you, they cannot make arguments in court on your behalf, and they cannot draft any legal documents including contracts. Any contracts or addendum’s written up during the process have already been approved and authorized by the legal board for that state. They cannot redraft any additional documents.
“Real estate agents that do these things risk losing their license, suffering fines, losing commission, and getting sued themselves. So long as the agent does not provide any legal information (only general knowledge or public information) all parties should be in compliance. Once it gets into legalities or lawsuits, it’s time to bring in a real estate attorney.”
Protect Your Buyer from these Horror Stories
Cornered into releasing earnest money by a shady landlord/seller. A Texas real estate agent (by the name of Cass) told the story of a young lady who was a client of hers. This client had, prior to becoming her client, been pressured by her former landlord/seller into releasing her earnest money. During her option period, she learned that the seller/landlord had hidden holes in walls with plywood in an attempt to cover up terrible termite damage. She was in her option period and was on a month-to-month lease with the owner.
When she filed for termination, the landlord called the police to remove her from the property. The police didn’t know that they were under contract for the home and had already paid the rent for that month. The lease and the contract were both undergone without real estate agents and attorneys, so the landlord fought the title company and the girl about who the earnest money belonged to. The client was so upset and stressed by this that she eventually signed a release of funds. In the meantime, the landlord found another agent to list the home for sale (before the earnest money dispute was even resolved). This is why every buyer should have a knowledgeable real estate agent for their transactions, even if they’re seemingly straightforward.
Holding your client hostage. Another realtor (Vivian Todd, in Beaumont, TX) told how her buyer’s new construction didn’t appraise. The buyer offered to come up on the offer and the builder refused, later changing their mind. By then the buyer had moved on. “The builder refuses to release the earnest money and said the buyer must pay for the blinds. I have repeatedly asked for the blinds, but the builder will not respond (no blinds have been installed and the house is on the market). This builder is holding my client hostage.” If mediation doesn’t work, agents should advise their buyers to seek counsel from a trusted real estate attorney.
The title company loses the earnest money deposit. A title company claimed to have mailed the earnest money deposit back to a client, but they didn’t receive it. They didn’t copy the cashier’s check or put it into the system. Always use a trusted title company and document every step of the way to ensure you’re backing up your client’s EDM with a paper trail.
Solutions to Help Buyers Regain Earnest Money
Guide Your Buyer Toward Mediation
According to David J. Willis of Lone Star Land Law, “The TREC contract formerly made the choice of mediation elective in paragraph 16. There is no longer a ‘yes or no’ box to check on the latest forms of this contract, so mediation is required unless this paragraph is struck and initialed or a special provisions addendum is attached that deals differently with dispute resolution. Generally, including a mediation requirement is a favorable provision for the seller, less so for the buyer.”
Your Buyer Can File A Lawsuit
“Lawsuits can be filed in justice court so long as the total amount claimed (including attorney’s fees) doesn’t exceed $10,000. If total damages exceed that amount, then a suit may be filed in the county court at law. Before filing legal action concerning earnest money, it’s useful to consider the practical reality that attorney’s fees and costs, once added up, can easily exceed the amount of earnest money in dispute. As a consequence, many earnest money disputes are resolved by the parties splitting the funds and going their separate ways,” David Willis says on his Loan Star Land Law blog.
Think Ahead for Your Next Client
If you want to avoid earnest money disputes in the figure, you could try to include a liquidated damages clause in the contract. It would need to be “something sufficiently harsh to discourage a seller from withholding these funds. A clause like this would have to be included in a special provisions addendum. In Magill v. Watson, the court disallowed such an arbitrary treble-damages penalty because it wasn’t rationally related to any actual damages that the buyer would suffer. It left open, however, the possibility that such a clause would be enforceable if the provision reflected a reasonable assessment of what the buyer’s damages would be,” David Willis said.
Of course, all of the advice contained in this article is for general purposes, not offered as legal advice. Always seek out legal counsel for your individual needs and questions, because the law is always changing.
Consider Close Concierge
There are several ways to get your buyer’s earnest money deposit back in Texas, including mediation, suing for the money, and including a liquidated damages clause. We’ve talked about how to avoid real estate horror stories associated with earnest money and covered what not to do. Are you finding these articles helpful? Just imagine how much more helpful you’d find us if you began using our trusted transaction coordinators! They’ll help you save time and money while maintaining compliance, so you don’t have to worry about horror stories on the transaction side. Get a demo today and see how much time and money we can save you!
Sean is CEO at Close Concierge. His goal is two-fold: to create the best company in the world to work for & to create the number one customer service company in the world, regardless of industry. He believes achieving both of these goals happens at the same time
Sean started his career at the Boston Consulting Group, where he met his wife. They live in Chicago with their son, London. Sean graduated The Wharton School with honors.