Selling and purchasing a home can be a long process, and sometimes things don’t go as planned. If you have a buyer fall through on buying your home then you might be wondering what happens to the earnest money, how it’s used and if it needs to be refunded. Read on to learn more about the ins and outs of earnest money.
Is Earnest Money Refundable?
What Exactly Is Earnest Money?
Earnest money is the deposit the buyer pays into an escrow account to show they are in earnest or serious about purchasing your home. This money is also called good faith money because it demonstrates that the seller is intent on moving forward with purchasing your home and isn’t just wasting your time. Often times earnest money can be 1-3% of the purchase price but the actual number is negotiable and determined by the buyer and seller before signing contracts.
Earnest money helps you, as the seller, to ensure that you are working with a serious buyer who is committed to making the home purchase work.
Using an Earnest Money Promissory Note
I’ve come across various forms of earnest money transactions. One of these is the usage of an earnest money promissory note. This is a document that represents a buyer’s pledge to pay earnest money within a certain timeframe, rather than providing the money upfront in cash or check.
Pros:
- It provides flexibility in transactions as it gives the buyer some time to arrange funds.
- It could be a more convenient option if immediate payment is not feasible.
- Negotiation leverage: It can sometimes be used as a negotiating tool in the buying process.
Cons:
- There’s a risk that the buyer might not fulfill the promise of payment.
- The process could become complicated if the terms of the note are not met.
- Not all sellers or real estate agents are open to this form of payment.
For buyers, a promissory note can offer a strategic advantage in situations where liquidity is an issue but should be approached with caution and transparency to ensure all parties feel secure in the transaction. For sellers, understanding the nature of promissory notes and their implications can open doors to more diverse buyer pools, potentially leading to faster sales. Ultimately, whether to use a promissory note or stick with traditional earnest money forms should be a decision made after careful consideration of the pros and cons, the specifics of the deal, and the comfort level of both parties involved.
Who Keeps the Earnest Money if the Deal Falls Through?
While the buyer may have been in earnest when they put the money in escrow, there are several factors that could still cause the deal to fall through.
So who gets to keep the money? The seller who has now lost time and potentially money by keeping their home off the market? Or the buyer who wanted to make the deal work but just couldn’t pull it off?
The answer isn’t always in favor of the buyer or the seller, it depends on the terms in the contract.
In the contract signed by both you and the buyer there could be contingencies that allow the buyer to receive their earnest money back. Contingencies generally have deadlines so a buyer must meet the contingency and deadline in order to get their money.
The types of contingencies that would allow a potential buyer to get their earnest money back include:
- Appraisal Contingency- If your home appraises for less than the agreed upon purchase price and you are unwilling to lower the price then the buyer could back out and retain their earnest money with this type of contingency.
- Some buyers will include a home inspection contingency. This means that if a home inspection comes back with serious issues or problems and you the seller are not willing to do the repairs then the buyer could back out of the deal.
- A home sale contingency protects you as a buyer and seller. If your current home isn’t able to sell before the deadline then you could back out of the purchase of your new home without losing your earnest money with this type of deal.
- Finally, if the buyer is denied funding from a bank then they could back out and not lose their earnest money with a funding contingency in place.
Keep in mind that these types of contingencies are clearly written into the contract. There is no automatic forfeit of earnest money if a deal falls through, so know what the contract says and what is due to you the buyer and to the seller based on the terms you agreed on.
How Is Earnest Money Refunded?
If a seller meets one of the contingencies within the time frame allotted then they need to contact you, the seller, in writing to clearly state why they do not want to continue. A realtor can help write an official letter to start the process.
As long as the seller does not contest your claims in getting your earnest money refunded then you both sign release forms agreeing to the earnest money’s return. Finally the buyer must alert the escrow company to let them know they are not following through with the home purchase so that the money can be refunded to the buyer.
Note To Sellers
As the seller it’s usually in your best interest to quickly sign the release forms and return the earnest money as soon as possible. You don’t want your home to sit on the market for long amounts of time (this can make buyers wary that something is wrong with the home) and you don’t want to lose more time and money with your home needing to go through the sales process all over again.
Avoid Returning Escrow Money — Sell to a Trusted Buyer
Doing your due diligence by working with pre-approved buyers and paying for a home inspection and an appraisal before listing your home can help negate some of the risks and avoid contingency offers and the loss of earnest money. But what if you can’t afford all the extra costs? What if you don’t have time to wait on buyers that could just fall through before closing? What if your home falls into the “poor condition” category, making it more likely that it would not go through with contingencies in the contract?
In these situations your best bet is to avoid the uncertainties and work with a professional who can pay cash and work quickly to purchase your home and not deal with earnest money and contingencies at all. Gary is an investor who is ready to make a fast cash offer on your home and he will purchase the property in any condition. If you can’t afford repairs required by home inspections or you don’t have the luxury of time on your side and need to sell quickly then Gary Buys Houses is the trusted home buyer to turn to in the state of Utah.