How do you get earnest money back after inspection if things go wrong? A bd home inspection can result in a renegotiation, or it can kill the deal. Either way, the situation presents complications that both the buyer and seller must deal with. One of those is what to do with the earnest money deposit (EMD).
- The contract should have a home inspections contingency
- The parties may dispute the money in escrow
- Sometimes the seller may refuse to release the EMD
If things go bad emotions can get in the way of good judgment, so lawyers will not release the money until there is a settlement and both sides abide by the decision. This process of releasing the money can be very short in clear cases, or it may go to court if both sides cannot agree.
Earnest Money and Home Inspection Contingency
Within your contract are several clauses to protect you if the deal goes bad. There are clauses to protect you if you cannot get financing, if the house does not appraise, and if the seller cannot provide clear title. There is also one to protect you if there is a major, unforeseen problem with the structure. We call this the home inspection contingency or the due diligence clause. Before you sign any contract:
- Read it and make sure that it contains this clause
- Carefully review the wording and make sure you understand exactly what to do if there is a problem
- Talk to your lawyer about anything you do not understand or want to change
That last part is very important. If you are uncomfortable you can ask for changes. While most residential real estate contracts are cookie cutter, they may not address your specific concerns. Therefore, anything is negotiable.
This period is often referred to as the due diligence period, and it is very important because this is the time when you can thoroughly inspect all aspects of the property. The contingency usually has specific language to deal with inspection issues. Investopedia lists these as:
- Approve the report – the deal moves forward
- Disapprove the report – back out and recover earnest money
- Request time for more inspections
- Request repairs or a concession
The contingency also stipulates a deadline. You only have so much time to have the inspection done, receive the report, and then review it. This deadline is usually 14 days after you sign the contract.
How to Get Money Out of Escrow After Inspection
In the previous section we went over the clause that allows you to back out of a real estate transaction if there is a bad home inspection. So, what happens to the money if things go wrong? If you decide to disapprove the report three things may happen, the seller may:
- Agree that the report gives a valid reason to void the transaction
- Offer remediation in the form or either repairs or a concession
- Dispute the validity of the issue
In the first two cases the seller agrees that there is a valid issue. They may agree to release the money immediately, or they may try to save the deal through renegotiation. Either way, if you want out you will get your earnest money back.
In these two cases you submit the report to your attorney with a written statement that you want to terminate the contract. Your lawyer then submits the information to the other side, and they sign the statement as well. Your attorney then contacts the escrow agency, and they write you a check for the EMD amount.
If the owner disputes the validity of the report things may get ugly. If they feel like the claim is not valid, they may not agree to release the money, and the attorneys, then, must continue to hold the money in escrow.
Seller refuses to release earnest money After the Inspection
As we saw in the last section, all parties must agree. Then, a well-documented process makes it easy for you to recover EMD if something goes wrong with the inspection. However, if the seller does not agree, then things get complicated.
NOLO tells us that your standard contingencies offer a wide range of reasons for the buyer to back out. The reason is that while you may have seen the house a couple of times, you really do not get a good idea about those details of the house until you spend time with the inspector. The inspection may last a few hours, and you get to really see the details. Therefore, the clause gives you a wide latitude to cancel the deal.
Having said that, the seller may dispute the validity of your claim. If this is the case, you should contact your attorney and submit your request to cancel in writing, stipulating your reasons. After that, the process may go through three phases before resolution:
- The two attorneys negotiate and settle
- Your case goes to mediation, and it gets settled through this process
- The case goes to court
If the attorneys can negotiate a settlement between the buyer and seller, this is the least expensive and easiest resolution. Mediation is more expensive, and if you take it to court it becomes very time consuming and expensive. However, the lawyers settle most disputes, and the cases never even go to mediation.
If there is a problem with the home inspection, you should not have any problems getting your EMD back. Standard contracts protect the buyer and give a wide range of issues that can trigger the clause. Further, most buyers do not fight to hold a buyer into a contract they truly do not want.
It is important, though, to always be aware of these two things: know your deadlines and never let them pass without acting if needed. Second, make sure that you document everything. If the other side disputes your claim, you will have a much easier time if you can show that you did everything you were supposed to do.