Earnest Money Refund
In most real estate transactions that don’t close in Hawaii, Maui or Oahu, the seller does not get to keep earnest money refund; most accepted offers become completed sales, and the earnest money becomes part of the purchase price.
However when real estate transactions fall apart, more often than not the earnest money is refunded to the buyer. Escrow companies may take small fees from the earnest money, but generally the buyer gets back most of the funds.
When deals go bad, buyers usually get a refund
Contrary to popular belief, the earnest money is not automatically forfeited to seller if the deal busts. The typical reasons for a broken deal are buyer (1) dissatisfaction with property reports or (2) inability to obtain financing. Both of these circumstances are typically “contingencies” in the purchase agreement. The buyer is allowed to cite these contingencies and cancel escrow without losing earnest money.
Accordingly, until contingencies are removed through the buyer explicitly submitting a contingency removal forms, the buyer typically has a strong claim to an earnest money refund.
When a deal go bad and it is buyer’s fault, buyer’s still usually get a refund
When the buyer causes a deal to bust, the seller often has a difficult time preventing the buyer from receiving an earnest money refund. This fact sounds unfair to sellers, and it is. However, such unfairness is nonetheless the reality.
Here is why. The earnest money is held in trust by the escrow company. Both buyer and seller must agree in writing on the release of the funds to the seller. Absent such a written agreement, escrow companies will not release the funds to the seller unless a court or arbitrator orders them to do so.
Usually buyers will not sign a form that says they are forfeiting tens of thousands of dollars. On the other side, sellers are usually reluctant to litigate, particularly since such litigation can prevent the seller from entering escrow with another party. The reason litigation can prevent the seller from entering escrow with another party is that the property is still technically in escrow with the original buyer until the original buyer and seller have signed escrow cancellation instructions.
Advice to sellers who don’t want to give buyer an earnest money refund
Typically, if the deal goes wrong early, it is best for you to quickly sign the documents provided by the escrow company that refund the earnest money to the buyer. If the deal goes deeper, you are still usually best served by signing and moving on to find the next buyer as quickly as possible.
If contingency removal has occurred and the buyer is unable to close, you can consider insisting on retaining the earnest money after serving your notice to perform. Understand, however, that in making such a decision, you will likely have to obtain a court order to get the funds from escrow and delay your sale to a new buyer for six months or more until the litigation is settled.
And while this is taking place your home is off the market….