If you’re selling a home, you likely required the buyers to put down an earnest money deposit when you accepted their offer. This deposit shows their serious intent to purchase your property. But in what situations can you actually keep the earnest money if the deal falls through? As a seller, it’s important to understand when you might be entitled to retain the buyer’s deposit.
When Can Seller Keep the Earnest Money?
Generally, a seller can keep the earnest money if the buyer breaches the contract, fails to follow contract terms, or is unable to close by the closing date. Your legal right to retain the deposit will depend on the specific contract terms and the reason for the buyer’s failure to close.
As the seller, you can retain the earnest money deposit if:
- The buyer breaches the purchase contract. If the buyer backs out for a reason not allowed in the contract, the earnest money provides damages to make up for your losses from the broken deal.
- The buyer doesn’t perform according to the agreement. If they fail to obtain financing and let their contingency lapse or violate another clause in the contract which amounts to a breach, you may be able to keep the deposit.
- The buyer doesn’t close the sale. If the set closing date passes and the buyer is unable or unwilling to complete the purchase, you can claim the earnest money as your own.
- The buyer defaults due to an invalid reason. Even if the buyer has a seemingly valid excuse like losing their job, you may be able to keep the deposit if the contract doesn’t allow termination for that reason.
- The purchase agreement states the seller keeps the deposit if the deal falls through. Your agent and attorney will negotiate contract terms allowing you to retain the earnest money under certain conditions.
What is Earnest Money?
Earnest money, also known as a good faith deposit, is a sum of money a buyer puts down when submitting a home purchase offer. It usually ranges from 1-5% of the total sales price.
This deposit goes into an escrow account and applies to the buyer’s down payment and closing costs when the sale closes. If the buyer defaults for no good reason, the earnest money gives the seller some compensation for taking their home off the market.
When Does the Seller Return the Earnest Money?
In other situations, you may have to give back the earnest money deposit:
- The buyer terminates for a valid reason permitted in the contract, like being unable to secure financing by the financing contingency date, even after making good faith efforts.
- You as the seller breach the purchase agreement in some way.
- Contingencies written into the agreement are not met, such as a home inspection uncovering major undiscovered problems.
- The buyer and seller mutually agree in writing to cancel the contract and release the earnest money.
- An external “act of God” event occurs that allows termination, like a natural disaster destroying the home.
In general, if the buyer upholds their contractual duties and makes reasonable efforts to close, you will likely not be able to retain their earnest money deposit if they need to cancel the purchase agreement.
Tips for Sellers on the Earnest Money Deposit
Follow these tips regarding earnest money deposits as a home seller:
- Consult your real estate attorney about the contract terms and earnest money best practices before listing your home or going under contract.
- Carefully review the default clauses and contingencies in the purchase contract that impact the earnest money.
- Don’t count on keeping the buyer’s deposit unless they clearly breach the agreement.
- Be reasonable if the buyer needs to terminate for reasons beyond their control and agree to refund the earnest money.
- Document all the buyer’s actions in case you do have cause to retain the earnest money if they default.
As a seller, make sure you understand when you are entitled to keep an earnest money deposit and when it needs to be returned to the buyer. Knowing the earnest money rules will help you avoid legal disputes.
The earnest money deposit is an important negotiating point between sellers and home buyers. As a seller, you generally can retain the buyer’s deposit if they default on the purchase contract. But in many cases, you will need to refund the earnest money. Protect yourself by understanding the earnest money processes in your state and being reasonable with buyers acting in good faith.