What happens to earnest money if the buyer backs out? When real estate deals fall apart, what happens can get confusing. Attorneys try to provide for every eventuality, but sometimes things get complicated.
- Earnest money may go to the buyer or seller depending on the contract terms
- If the buyer backs out without cause, the seller may claim the earnest money deposit (EMD)
If the contract provides a condition for the buyer to back out, then they may recover the EMD. Further, if there is a dispute about the language of the contract, then it may go to arbitration or even court.
Who Gets Earnest Money if the Deal Falls Through?
If the deal falls through it may go to the buyer, the seller or court. When the buyer walks away without cause, the seller will get the money. If the contract provides an out for the buyer, then they should recover their money.
Often, though, when a deal falls apart both sides claim the EMD. Citrus Heritage Escrow shows a good timeline for what happens in this case. The first action is the attorneys attempt to resolve the dispute. If they cannot, they usually try mediation. Finally, if this fails, the matter goes to court. Usually by then legal costs eat up any money in the account.
What is the Seller’s Compensation if the Buyer Backs Out?
If the buyer backs out without cause the seller’s compensation is usually the earnest money. Most of the time, the seller believes this is adequate. In some cases, it is not. If there is no EMD, or the amount is small, they may also sue the buyer for damages.
Final Thoughts About What Happens to Earnest Money if the Buyer Backs Out
In most cases, if the buyer backs out, they do so according to a clause in the contract. There are several, and they usually include provisions for inspection problems, low appraisals, and mortgage contingencies. There may be others as well, depending on the buyer’s situation.
On the other hand, earnest money protects against the buyer getting cold feet and just walking away. In this case, the seller has a very solid claim to the money. Often, though, this gets murky. It can end up in court.
HomeLight has a few suggestions on how you can protect yourself and your money is to read the contract carefully. If any part confuses you, then ask your lawyer to clarify any language in the contract. If you do need to cancel the transaction speak to your legal counsel first to make sure you have firm grounds to exit the deal.