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Is earnest money refundable

Let’s get to the answer right off the bat: earnest money is refundable, but only if specific situations are met and that they are met by their deadlines.

Confusing?

You’re not alone. I’m a licensed real estate agent and I’ve helped close almost 600 residential transactions in my career. Earnest money is one of the most talked about and confusing concepts within the real estate contract.

This blog post will attempt to demystify the earnest money process. By the end of this post, you’ll know:

  • Why you might want your earnest money back
  • In what situations is earnest money refundable
  • How do you ensure you follow your contract to receive earnest money
  • The steps to receive your earnest money back
  • What is earnest money

 

I’m also hyper aware that if you are reading this article, something not great has probably happened to your transaction and you’re looking to get your cash back from the title company, real estate agent, or whoever is holding it.

With that in mind, let’s jump right in.

 

Why would someone want their earnest money back?

The only reason to want your earnest money back as a buyer is because you no longer want to move forward with your purchase. That’s OK: it’s not uncommon for this to happen. From my experience, roughly 10% of transactions lead to a situation where the buyer wants their earnest money back.

Said differently, take comfort in knowing that everyone involves in the transaction (agents, title, lawyers, etc.) has been through this situation before. You are NOT weird or being unreasonable if you want to cancel a transaction and get your EMD (earnest money deposit) back.

What could cause a transaction to fall apart?

A transaction typically falls apart due to the buyer discovering a new fact that they were not aware of earlier. This could include:

  • An issue with the home’s condition that was only revealed during an inspection
  • The bank not agreeing with the purchase price due to appraisal
  • The buyer not being to be approved for financing

Again, in my experience, about 90% of transactions that fall apart because of one of these three issues.

The other 10% tend to be unique, one-off situations. For example, I’ve seen a few transactions where the buyer lost their job after signing the contract. Since they no longer had a job, they no longer were able to buy the home.

Again, all real estate professionals in your transaction will have seen this a million times before. This is not weird or unusual for you to have one of these situations occur and ask for your earnest money back.

Could the seller refuse to refund the earnest money?

One of the key elements of earnest money is that a neutral third party, like a title company, are the ones the hold it.

That way, it typically does not matter if the seller refuses to refund the earnest money. They don’t have the money anyways so it’s not theirs to refuse to refund!

As long as the buyers claim one of the contingencies in the contract on time, you should be good to go to receive the earnest money back.

There are a few exceptions here to make sure you know of though.

It is quite rare in residential real estate, but sometimes buyers will offer to have the earnest money be “hard.” This is the industry term for stating that the earnest money is non-refundable.

You see this most commonly in commercial and industrial real estate, but it sometimes comes into play in residential. Unless you specifically signed something that says that the EMD is hard, you should be good to go.

The trick is utilizing one of the contingencies to get the EMD back.

There are typically three contingencies that would enable you to receive your earnest money back

Here’s an important point to clarify: the buyer cannot simply say they no longer want to buy the property and demand their earnest money back.

The buyer must provide a reason why they no longer want to buy the property. That reason needs to be one of the contingency outlined within the contract.

While every state in the country utilizes a separate real estate contract, almost 100% of them have all three of these contingencies below. These are how you get your earnest money back.

Inspection contingency is the first opportunity to receive your earnest money deposit back

The first opportunity for your earnest money deposit return is inspection. From a chronological perspective, this will typically occur first. The exact date will depend on which state you are in.

Each contract will have a deadline for which the buyer can cancel the contract due to issues raised during inspection.

Importantly, issues raised during inspection is often open to interpretation. While some states treat this differently, any issue raised during inspection could theoretically be grounds for contract termination.

Said differently: I’ve seen people cancel contracts and get their earnest money deposit back over exceptionally small issues. It is technically their right to do so, as long as they provided written notice by the date of contingency. More on that later.

Appraisal contingency is the second opportunity to receive your earnest money back

The next opportunity is appraisal. This concept can be confusing, so let me take a second to explain.

When you sign a contract, that means you and the seller agree on a purchase price. That does NOT mean the bank agrees on the purchase price. This is important, because if the bank forecloses on the mortgage, the bank wants to know that the house they’ll get in foreclosure is enough to cover their expenses.

So, they order an appraisal. This is a licensed professional, called an appraiser, who will visit the home and issue a determination of how much the home is worth. If the appraisal comes in low, then buyers typically have the right to cancel.

Let’s do an example to help illustrate.

What happens in a low appraisal?

Let’s say you are buying a house for $400,000 with a 10% down payment of $40,000. The appraiser does their work and says the house is worth $390,000.

The bank will now completely forget that the house is under contract at $400K and will only care about the $390K appraised price. They will only give you a loan for $390K.

That means the purchase price will need to be renegotiated to $390,000 or the buyer will cover the “gap.”

In this case, that means the buyer will pay a downpayment of $39,000 (10% of the $390,000) plus an additional $10K (the gap between $400K and $390K) for a total of $49,000. This is obviously a lot more than the planned down payment of $40,000.

For that reason, buyers typically have the right to cancel the contract here since they suddenly need to come up with a lot more cash!

There are three exceptions to know about here.

First, a contract that is cash-only will not have an appraisal contingency since there is no bank here.

Second, many real estate agents push clients to waive their appraisal contingency. If you do, then you do not have the right to terminate here

Third, you only have the right to cancel the contract if the appraisal comes in below the purchase price. This is not incredibly common and happens maybe ~10% of the time.

Think of the appraisal contingency this way: you could cancel a contract over it and therefore get your earnest money deposit back, but it is far from a guarantee that you’ll have the right to do so since it will have to be a financed transaction AND the appraisal will have to come in low.

Finance contingency is the last chance to get earnest money back

The last contingency you have to cancel a contract and get your earnest money deposit back is via the financing contingency. This only applies to contracts that have a mortgage on it and typically expires about a week before closing.

Invoking the financing contingency means that you cannot get approval from the lender to get a mortgage. This is different from the pre-approval.

The pre-approval said that, on the initial review of your finances, the lender was willing to look at your finances in more detail. The lack of approval now means the lender did that deeper look and decided you would not be approved.

This is relatively rare, and happens maybe ~5% of the time.

Some buyers agents try to use this as an emergency escape clause from the contract where, if their clients change their mind close to closing, they will claim no financing approval. To get around this, it’s not uncommon for listing agents to request a signed letter from the lender that says approval was not granted.

Again, this contingency is hard to meet and quite rare. The reason why is chronologically, it comes fairly close to closing. The sellers have probably are pretty close to being done packing up their house. For that reason, they don’t want the contract to fall apart now.

Some contracts might have additional contingencies where you can receive EMD back

There are additional contingencies that might be built into your contract. If these contingencies exist for you, it’s entirely possible you’ll have another way to get your earnest money deposit back.

These conditions are all added into contracts individually, meaning, they don’t automatically apply within your contract.

For example, one of the most common ones is the home sale contingency. This means you agree to buy the home IF you can sell your existing home by a certain date. If you don’t sell by that date, you are able to terminate the purchase agreement and get your earnest money deposit back.

Another common one would be if there are repairs being done on the house. You might have made an offer on buying the house, contingent on the sellers fixing something. If that’s the case and it doesn’t get fixed on time, you can also get your earnest money deposit back.

Again, these are not present in all contracts. If you are unsure if they exist in your contract, I’d ask your agent to review it with you.

How to follow your contract to receive earnest money back

OK, now that we have talked about contingencies where you could get your earnest money deposit back, now let’s talk about how to actually do it.

Check your contract to identify deadlines for EMD receipt

The first step here is to pay close attention to dates. All contingencies have a specific date by which you need to officially give notice by. Meaning, if you fail to give notice by the required date, it doesn’t matter that you have a contingency in there

Check your contract carefully here. Every state is different. Some states will say the contingency expires 3 days after contract signature. Some states will say the contingency expires 3 business days after contract signature.

I would highly recommend putting these dates within your calendar immediately after the contract gets accepted. That way, you know the dates you need to give notice by in time to get your earnest money back.

Request your agent to draft the written termination and release of earnest money

Once you know you want to terminate and invoke a contingency, you need to provide official written notice. Some states, this is an amendment. In others, there is an official termination notice

Once you know you are going to do this, I’d communicate this to your agent ASAP and sign it as soon as your agent sends it to you. They’ll likely send it via Docusign or similar.

Speed is the name of the game here. The last thing you want to do is be late to submit this and find out you missed the deadline.

Sign this request at least 24 hours ahead of the deadline

Again, in the spirit of making sure you don’t miss getting this submitted in time, make sure you sign the termination ASAP. I’d try to sign at least 24 hours before the deadline so you have plenty of time to get this submitted

Ensure your agent submits this to the other agent well ahead of the deadline

Once signed, your agent still needs to submit this to the other transaction party’s for this to count. Make sure you get proof from your agent that they have sent this to the title company, attorney, and other real estate agent.

The steps to receive your earnest money deposit back should be relatively straightforward

Once this document has been signed, it’s now relatively easy to get your earnest money back. Since the documents have been signed and delivered on time, the only step left is to officially collect the money.

However, since you are now contractually owed this money, it’s actually not terribly difficult to do this. The most important step is making sure the title company, agents, or whoever holds the money knows how to get it back to you

Provide your best bank information to the title company or stop by to receive a check

You’ve sent over the earnest money. The last step now to getting your earnest money deposit back is to figure out how to get this earnest money deposit back to you

In most cases, the hardest part of this process is making sure whoever has the earnest money knows how to wire the money back to you. For that reason, I’d recommend reaching out to the title company and providing your wiring instructions, or, if possible, offering to stop by to pick up the check.

Earnest money FAQ: What is earnest money?

The earnest money deposit is how you can help communicate to the sellers that you are a serious buyer. The reason why is because you are putting money down onto the table on the first day of the transaction.

Since you are putting money down on day #1, it communicates that you are more likely to close on the transaction than not.

Does every real estate contract have earnest money?

Almost every contract today has earnest money. The only exceptions I’ve seen are all cash, 1 week close deals where the house is a dump and being purchased by a rehabber or flipper.

How much earnest money is standard for a real estate transaction?

The standard consensus is that earnest money should be at least 1% of the purchase price.

Lindsay Sharp

Sunday 3rd of July 2022

Why does the release of earnest money form say "this releases all parties from the contract" when isn't part of the contract returning the earnest money in the applicable situation?

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