In real estate, the importance of being earnest is measured not by a handshake and a “Sure, we’ll buy your house,” but cold hard cash—aka earnest money.
This safeguard serves to keep fickle buyers from changing their minds unnecessarily, however, there are plenty of reasons you can—and should—bail with your earnest money firmly in hand.
Here we will discuss six good reasons to walk away that won’t force you to forfeit this chunk of money.
To beat out other offers, you could provide a large earnest money deposit as part of your offer to prove that you’re serious, and to make your offer stand out. If something goes wrong in the transaction process, there’s a possibility that either you will get your earnest money deposit back or the seller will keep it.
The size of your earnest money deposit depends on your local market’s customs and conditions. While a larger earnest money deposit can help make your bid stand out, there are other methods to stave off competition. For example, you could offer to waive some contingencies or offer more than the list price.
Getting—or losing—your earnest money deposit
No matter the size of your earnest money deposit, you must be extremely careful to understand the terms of contract as it relates to your earnest money deposit. Pay particular attention to the circumstances that would govern a refund. Earnest deposits are also regulated by state laws, so speak with your real estate agent about the rules in your locale.
In the majority of cases, buyers get their deposit back in full if something goes wrong—particularly if an issue crops up early in the transaction. Below are some examples of those situations which would allow you to cancel your contract and receive an earnest money refund.
1. The house appraised for less than expected
One surefire way to get your earnest money back is to have an appraisal contingency. Your lender will want to have the property appraised to see if it’s really worth what you agreed to pay for it. If the estimate is lower, the lender will loan only up to the lower amount—which means it’s up to you to cover the difference. But with an appraisal contingency, “the buyer only has to buy the home at the appraised value,” says Joshua Jarvis, a Realtor® in Atlanta.
An appraisal contingency gives you leverage to ask the seller to lower the price or to sweeten the deal by, say, paying your closing costs. But if no agreement is reached, then you can take your earnest deposit and skedaddle.
2. Your financing fell through
If you can’t find a lender who will loan you money within a certain amount of time, a financing contingency allows you to get your earnest deposit back. Normally you have to be flat-out denied financing by the lender in order to receive a refund; in other words, you can’t bail scot-free because you didn’t like the interest rate and terms offered.
A typical time frame to secure financing is 20-25 days, however, contract terms on this do vary.
However, if a sale fails to go to settlement for a reason that’s entirely your fault, the seller will be within their rights to keep the deposit. See Three Events That Will Result in the Forfeiture of Your Earnest Money for additional details. For example, if your inspection turns up any serious issues and you fail to present your notice of termination by the contract deadline (usually 10-12 days) but your elect to terminate the contract and refuse to proceed—the sellers can keep your deposit.
3. Your current home failed to sell
It’s hard to buy a home if all your money is tied up in your current property—which is why many buyers in this all-too-common scenario include a home sale contingency in their contract: Their purchase of the new home is subject to the sale of their current one typically within a specific amount of time. How much time usually depends on how quickly homes are selling within your market. Your Realtor can offer more specifics here. But as long as you have this contingency in place, if your old home doesn’t sell, you can back out of your new purchase without forfeiting anything but your time.
4. You find out the home has a major flaw
Most purchases are contingent on a satisfactory home inspection. While many flaws can be fixed allowing the deal to proceed, there are some issues that should give you major pause. They include a history of problems with mold, foundation issues, significant electrical, and flooding. If your home inspection unearths these problems and you didn’t agree to purchase the home “as-is” you can either request the seller make the required repairs, negotiate to pay a lower price (plowing you to pay for repairs after closing and to oversee the work to ensure it is performed properly), or terminate the contract and take your earnest money with you.
Also keep in mind that sellers are legally required to reveal certain flaws (which vary by state) in a disclosure document. So if you find out a seller has tried to cover something up—and that something is big—it is typically well within your rights to take your earnest money and run.
5. The house isn’t finished
If you’re buying a new build this is a possibility but pay attention to the terms of the purchase contract as the builders typically require their contracts be used and these almost always give the builders extended windows in which to deliver the finished home. But if the builder fails to deliver the finished new home by the contract deadline, the buyer would be able to back out and get their earnest money back.
6. The seller backs out
This may be a no-brainer but just in case you’re wondering: You’re entitled to your earnest money if the seller backs out for whatever reason and in fact you might be able to sue the seller for non-performance. Perhaps the most common scenario for this is when you’ve got a sale contingency, but while you’re waiting to sell your home the sellers decide to take another offer. But sellers can and do bail for all kinds of reasons, and whatever they are, rest assured, your earnest money is yours to keep in this instance.
Keep in mind, though, that it all depends on your contract: If it says your earnest money is nonrefundable, then you’re probably not getting it back without a lawsuit. If it is refundable, you’ll then need to get a release of contract and disbursement of earnest money form signed by all parties.
If you do make an earnest money deposit
You’ll want to consult with a real estate agent on the idea of an earnest money deposit. Your agent should do the following things to protect you:
- Ensure the contract is written with your interests in mind.
- Counsel you about each contingency and whether you should set a time limit on the contingency, waive it, or keep it.
- Maintain a calendar of all dates to ensure the contract is being followed.
Be certain to keep a copy of the check or bank wire, because your lender may request a copy.
Also, make sure you are making the deposit payable to a real estate brokerage, law firm, escrow firm, or title company so you know the money is being held safely until your transaction is complete.
If you have doubts that your transaction will go to completion, try to give the smallest possible deposit.
Remember that everything in a real estate transaction is negotiable, so you and the seller can always discuss increasing the amount of your deposit as part of the contract.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235