Understanding disputes over earnest money deposits

On Behalf of | Jun 20, 2024 | residential real estate | 0 comments

Earnest money is a deposit made by a buyer to show their serious intention to purchase a home. It is usually held in an escrow account until the buyer completes the sale. This money acts as a financial commitment, but it can lead to complications and disputes.

Common reasons for disputes

Disputes over earnest money often arise due to several reasons. For example, if the buyer decides not to go through with the purchase, they may forfeit their earnest money. This typically occurs when they back out without a valid reason outlined in the contract.

Most real estate contracts have contingencies that protect the buyer. These include financing, inspection, or appraisal contingencies. If these conditions are not met, the buyer can usually get their earnest money back. Also, if the seller fails to meet the terms of the contract, the buyer may also receive their earnest money back.

Steps to resolve disputes

To handle disputes over earnest money deposits, follow these steps:

  • Review the contract: The first step is to carefully review the purchase agreement. The contract will outline the conditions under which earnest money is refundable.
  • Communicate with the other party: Open communication can often resolve misunderstandings. Discuss the issue with the other party to see if you can reach a mutual agreement.
  • Mediation: If direct communication does not work, mediation can be a helpful next step. A neutral third party can help facilitate a resolution.
  • Seek legal advice: If mediation fails, consult with a legal professional. A professional who specializes in real estate law can provide guidance on the next steps.

As a last resort, disputes over earnest money can go to court. This process can be lengthy and costly, so it is often best to try to resolve the issue through other means first.

Avoiding disputes and finding resolution

Work toward preventing disputes over earnest money deposits before a situation arises. Ensure the contract outlines the conditions under which the earnest money is refundable. Both buyers and sellers should fully understand the contingencies in the contract. It is also crucial for both parties to act in good faith and adhere to the terms of the contract.

Navigating disputes over earnest money deposits can be challenging. However, understanding your contract and communicating effectively can often lead to a resolution. Taking proactive steps during closing allows buyers to handle disputes with greater confidence.