What Happens if Earnest Money is Not Deposited in Texas?
We’ve covered several topics on earnest money, including a summary of what it is, how much is appropriate, and when the earnest money deposit deadline is. Today we’ll review all of those topics and then cover what you can expect as a buyer’s agent if your buyer is late to (or refuses to) make their earnest money deposit. It’s important to warn your buyer that the seller has the right to cancel the contract if the payment isn’t sent in time, and if the buyer moves quickly, they may still be able to save the contract and have rights to the property.
The Purpose of Earnest Money
In another blog, we explained that earnest money is the amount agreed to in the contract that a buyer should pay soon after they enter into a contract as a show of “good faith” that they intend to purchase the property. To put it in the words of Barbara Marquand, a writer at Nerdwallet, you do this to “show the seller you’re serious about buying,” and when the sale closes, “you can keep the cash or apply the money toward the purchase.”
Earnest money is important because “After accepting an offer, the seller takes the home off the market until the sale closes, which can take several weeks. The earnest money helps assure the seller that a buyer is acting in good faith, and it provides them with compensation if the buyer backs out of a deal without a valid reason,” Barbara Marquand continues in her article.
How Much Earnest Money?
The amount of earnest money can vary depending on a number of factors. If the real estate market is particularly competitive, the usual standard will fly out the window.
“Earnest money is typically between 1% and 2% of the real estate purchase price, but it can go as high as 10%. Since the money will serve as monetary damage if the buyer breaches the contract and fails to close, the seller must also carefully consider what amount would adequately compensate for the lost time in selling the home,” says Larry Mitchell, a realtor and broker associate in Killeen.
He admonishes sellers, “Be reasonable – too high an earnest money requirement could scare away potential buyers.”
A Reminder of the EMD Deadline
Buyers are given an earnest money deposit deadline of three days (unless the deadline falls on a weekend or holiday, in which case the deadline is the following business day). As straightforward as this may seem, real estate agents sometimes fall into the trap of giving their buyers the wrong deadline date.
“Many agents are confused… because they think that all weekend days and legal days are excluded from the counting days,” says Frank Gray of Abby Realty. “Let’s say the contract’s effective date is on a Thursday, so the agent counts Friday as day one, skips Saturday and Sunday, counts Monday as day two, and Tuesday as the delivery deadline. This is incorrect. If the effective date is on Thursday, Friday counts as day one, but Saturday is counted as day two. Since day three is a Sunday, the delivery deadline falls on Monday.”
For more information on when to deliver the earnest money, feel free to check out this great visual from the Texas Real Estate website. Like other real estate deadlines, the earnest money deposit deadline is of utmost importance to the transaction process. As they say, “Time is of the essence.”
Seller Can Cancel Their Contract Without EMD
An anonymous real estate agent posed a question to TAR via their legal hotline: “What happens when a buyer doesn’t pay the earnest money?”
TAR staff responded, “If the contract has been properly executed by all parties, there is still a binding contract even when the buyer hasn’t deposited the earnest money. The earnest money is not consideration for the contract. However, if a buyer doesn’t deposit the earnest money with the escrow agent within a reasonable time after contract execution, the buyer would be in default, and the seller could exercise her rights under a default provision.”
What are Default Provisions?
According to the Coran Ober P.C. blog, “The default provision sets forth the conditions under which one of the parties will not have fulfilled its obligations under the contract. For example, failing to deliver goods or services on time or failing to pay on time would trigger a default. Often, these provisions enable the non-defaulting party to cancel the contract.
“Even in the event of a default, some contracts will call for thirty days to pass or written notice before the other party can cancel the contract. It’s very important that you understand the default and cancellation provisions that you enter into.”
In paragraph 15 of the TREC form 20-15, the default provisions are stated. These two remedies are that the unoffending party can cancel the contract if the other party defaults or the unoffending party can demand specific performance.
Frank Gray of Abby Realty said: “The sellers can’t sue the buyers for failure to deliver the earnest money. Their remedy, should they choose to exercise it, is to cancel the contract.”
“If the contract states that damages are limited to the down payment and there is no down payment, and specific performance is not a remedy provided for the seller in the contract, there will be nothing further for the seller to pursue,” said Gennady Litvin of Moshe’s Law in New York.
(For more information on breaches of contract by the buyer, check out their post on what to do when buyers breach their real estate contract.)
If Your Buyer Wants the Home
Perhaps your buyer has knowingly breached the contract by neglecting to pay the earnest money deposit – but what if your buyer simply forgot or couldn’t send it by the deadline? There is still a glimmer of hope if they act quickly. As long as the buyer deposits the earnest money before the seller gets to the title company to terminate the contract, the contract will remain intact.
Lydia Blair of candysdirt.com states, “If the buyer doesn’t deliver the EM by the deadline, the seller may terminate the contract. If frees the seller to sell to someone else, but there’s a catch: The seller may terminate the contract only if the termination of contract notice is received by the title company before the buyer deposits the earnest money with the title company. It could become a race to the title company.”
She goes on to detail the role of the title agent. “Even though the title agent is clocking the time of delivery, keep in mind that the title agency is not a party to the contract and bears no responsibility for working out the differences between the parties. It says so in paragraph 18A of the standard Texas real estate contract. ‘The escrow agent is not a party to this contract and does not have liability for the performance or nonperformance of any party to the contract…’ The moral: deliver by the deadline!”
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