Jacob Burdis, PhD is a professional dabbler with experience in entrepreneurship, educational technology, digital language learning, product management, and real estate investing.
Richard Haddad , Executive Editor Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
In many cases, if a homebuyer wants to back out of a contract and retrieve their earnest money, they’ll be able to find a way to do so within the confines of the real estate purchase contract. Real estate contracts are generally stacked in the buyer’s favor, so that all the way up until the final signatures, they may still have an escape route.
This isn’t true in all cases; there are specific ways that a seller can structure the contract to make it more difficult for a buyer to retrieve their earnest money at the final hour.
In this guide, we’ll outline the scenarios where you’re vulnerable as a seller, where you’re in the right to claim the earnest money due to the buyer failing to uphold their end of the contract, and what things you can do to protect yourself against the risk of a buyer pulling out at the last moment.
DISCLAIMER: This blog post is for informational purposes, not legal advice. If you need assistance navigating the legalities of keeping earnest money from a real estate transaction, HomeLight always encourages you to reach out to your own advisor.
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Earnest money is a deposit from a buyer paid at or immediately after having an offer accepted for a home to indicate that they are serious about following through with the transaction. Earnest money is often referred to as a “good faith” deposit.
The deposit comes with certain conditions and time periods that define when the buyer can terminate the contract and reclaim the earnest money. However, if the buyer terminates the contract for any other reason not specified in these conditions, the seller is typically entitled to keep the earnest money as a concession for the time they took the home off the market to enter into the exclusive agreement.
If a seller terminates the contract outside of these contingencies, they typically must forfeit the buyer’s earnest money and — depending on the circumstances — may even be required to pay additional money damages and face other possible repercussions for breach of contract.
“It’s really good faith money,” says Kelly Allen, a top agent and seller representative specialist in Marietta, Georgia. “It’s there in case the buyer terminates the contract for any reason outside of their contingencies.”
In most cases, real estate purchase contracts are exclusive agreements, meaning a seller can’t continue marketing the home and accepting additional offers once the home is under contract. The danger to a seller in this scenario is having to pay an extra mortgage payment and additional marketing fees if, after weeks of being wrapped up in an exclusive agreement with a buyer, the buyer falls through.
Earnest money is meant to compensate the seller for the time wasted in the event of a failed contract. It can be a powerful tool in negotiations to make an offer stronger: The higher the earnest money, the fewer contingencies, and the shorter the dates connected to the contingencies, the stronger the offer.