Protecting Homebuyers and Sellers from Earnest Money Disputes

The last thing a homebuyer wants is to emotionally commit to purchasing a home and then lose it. Similarly, no seller wants to select a buyer, only to see the home sale fall apart. Everybody made plans. Suddenly, both parties have to start over. When the sale falls through, both buyer and seller can feel an emotional attachment to the initial earnest money deposit. That’s when earnest money disputes arise.

Sales fall through for unexpected reasons. Sometimes it’s an unforseen life event, cold feet or a sudden change in finances. Earnest money disputes seek to determine whether the buyer or the seller deserves to retain the original monetary deposit. If you’re a potential buyer or seller, it’s a good idea to understand a few concepts about earnest money to help reduce the possibility of a bitter trip to the courtroom. 

Earnest money captures a seller’s attention. It is the initial deposit that expresses a buyer’s commitment to the purchase of property. It’s a percentage of the down payment. Therefore, it requires an understanding of what you can afford right away. Two percent or ten percent, the deposit amount is up to the buyer and seller to choose. Once a buyer’s bid is selected, earnest money enters into an escrow account. Once the purchase closes, the seller receives the earnest money right away. 

At Holmquist + Gardiner, we’re experts at resolving earnest money disputes. We represent both buyers and sellers of residential and commercial properties who are involved in complex conflicts involving home sale transactions and litigation. We frequently provide our clients with expert guidance to resolve conflicts quickly and efficiently.

Why Earnest Money Disputes Happen

For the seller, earnest money is a protective agent. The seller is relying on the buyer to purchase a property. When the sale falls through, that initial good-faith deposit can become “damages” demanded by the seller to relieve the burden of personal time and effort, or the loss of valuable time the home could have continued on the market. The difference between one month to the next can tick percentages off a home’s value. 

In Seattle’s hot housing market, a larger earnest money deposit can entice a seller in a competitive situation. As the amount of the earnest money deposit increases, so does the possibility of a contentious earnest money dispute. Nobody wants to go to court and pay attorney fees to retrieve $2,000. But $10,000? That’s more likely worth one’s time and effort.

Another strategy to entice sellers, favored locally, is to wave contingencies. Contingencies are predefined opportunities, such as home inspections and financing, found within the purchase agreement that allow the potential buyer to back out of the sale without repercussion. Sale agreements are rather black and white. A failed inspection gives the buyer the opportunity to proceed to the next stage, or full-stop. Waving a contingency is a risk. If there is no clearly defined contingency and the buyer backs out, the seller may have a strong argument to receive the earnest money deposit.

The economy rises and falls. If a sudden economic shift blocks financing, the buyer may lose the ability to pay for the property and need to back out of the deal. 

An unforeseen life event could occur. In one instance, a couple got married, put down an offer on a house, and days later, initiated their divorce. They couldn’t afford the property without a joint income and they backed out of the sale. But the former couple understood the terms of their sale agreement. Their agreement included a financing contingency. The newly separated buyers sent notice within the contractual set amount of time. They followed the proper terms and procedures of their agreement and received their earnest money back. 

It’s important to understand that there is always room for negotiation. When a home purchase agreement is voided, both parties can feel like their side’s emotional argument holds the most weight. 

A Buyer Must Exit A Home Purchase Sales Agreement – Now What?

Escrow is a neutral account. Therefore, in the event a sale falls through, the earnest money must be returned to one party or another, or sometimes split in some manner between the parties. In the event of a dispute, the escrow company will file an interpleader lawsuit. The escrow company sues both buyer and seller to force an argument in court to determine which party the money belongs to. Once filed suit, the earnest money exits escrow and enters the court registry. 

If you are a buyer considering backing out of a home purchase agreement or a seller who has just experienced purchase agreement that fell through, consult with a real estate attorney to determine the proper steps necessary to recuperate your earnest money deposit. These conflicts grow more complex without an experienced attorney to help you properly execute your exit.

The talented attorneys at Holmquist + Gardiner are experts at residential acquisitions and sales. Our attorneys routinely help clients navigate through complex earnest money disputes. We know that every transaction is unique and provide transparent and efficient legal services that act in the best interest of each individual client.

If you’re a residential buyer or seller in need of legal expertise, contact an attorney today.