When you submit a contract on a house, you also submit what they call ‘earnest money.’ This is a deposit that is a portion of your down payment money which you will use to purchase the house. Earnest money can be as little as $500, but we have handled earnest money as much as $250,000. The money is usually held by the title company or a brokerage firm during the course of the contract. The funds are used and released at closing. In the event, that a dispute arises in the contract or a buyer defaults during the contract, a seller may attempt to terminate the contract and keep the buyer’s earnest money. Most sellers feel that this is a pretty straightforward and easy process because the contract is specific and binding. While a seller may be justified in keeping a buyer’s earnest money, it is very difficult to do particularly if the buyer decides to fight you. Let’s take a look at the process and let’s assume the following scenario: Buyer was under contract with a seller and Buyer has defaulted on one or more of the provisions in the contract. Seller and Buyer terminate the contract, but Seller believes that he is entitled to keep the buyer’s earnest money, put the house back on the market, and accept another offer.
Having been through more times than I can recall, here’s how this could go:
- Upon an agreed termination of the contract, Seller sends the Buyer a notice to demand a release of earnest money from the title company to the seller. The buyer MUST agree to forfeit the earnest money and sign the release. If they DO NOT agree to sign the form, the title company or brokerage firm cannot issue the money to the seller. The key word here is AGREE; both parties must agree that the seller can keep the earnest money. Rarely does this happen.
- The next thing that happens after the buyer refuses to sign the release of earnest money is the seller sends the buyer a notice for arbitration as provided for in the Colorado real estate contract. Once the buyer receives the notice, the clock starts ticking, and both parties have 30 days to gather their files, their managing brokers, and get scheduled with a third party arbitrator. The problem with this is that arbitration is NON-BINDING! Even if the arbitrator rules in the seller’s favor, the buyer can still refuse to sign the earnest money release form.
- Which brings us to the next step. If a settlement is not reached in arbitration, the parties can still negotiate a compromise outside of court. More than likely, the next step is the seller sues the buyer for the earnest money. The Colorado contract also allows the seller to sue and recover all attorney’s fees for the prevailing party.
- Once you have decided to sue, you’ll need to hire an attorney. Since I have been through this with clients before, I’d say that it’s very expensive, so you better make sure that it’s a significant amount of earnest money to go after. Otherwise, the attorney’s fees, court costs, time, and aggravation will far exceed the amount you win in court. In addition, depending on the amount of the earnest money, it will either be held in County Court or for larger sums, District Court. This process is not short. In most cases, earnest money suits can last six months, a year, or longer. Again, you better make sure that it’s worth it.
Who gets the earnest money?
Assuming it gets this far, a judge will decide on who is the prevailing party and award the earnest money, possibly damages (if you can show that you were damaged), and attorney’s fees. Ninety-five percent of the time, it never gets to court. The two parties begin to realize the cost, time and headache involved with no guarantee of winning. At some point, a settlement is reached out of court; not always, but most of the time.
So the next time you are selling your property and think you are protected and can always keep the buyer’s earnest money in case the deal goes sideways, remember this column. It’s difficult and rare to keep a buyer’s earnest money, particularly if they are going to fight you.
Dan Polimino is a Broker/Owner with The Hawaii Team, Keller Williams Realty Maui. Contact Dan at 808-913-0899, Keller Williams Realty Maui.
