Whether you can get your earnest money back if you cancel your real estate contract depends on the specific terms and conditions outlined in the contract and the circumstances surrounding the cancellation. An earnest money deposit is a sum of money provided by the buyer in a real estate transaction that shows the seller the buyer is committed to purchasing the property.
When a buyer signs a contract, they put down earnest money, anywhere in the range of $1000 to upwards of $50,000, to show how serious they are about purchasing the real estate. The more money that you are willing to put down as a buyer, the more likely the seller will accept your contract if there are competing bids.
Once the contract is signed and accepted by both parties, the earnest money is held by a third party, (typically a lawyer or real estate agent), until the day of the closing. When the closing day comes, the funds are released toward the buyer’s down payment.
However, what happens to the money if the deal is terminated? If the seller cancels the deal, the money will be automatically given back to the buyer. If the buyer cancels the contract, there are several factors that can influence whether they can recover their earnest money.
Most real estate contracts include contingencies that allow the buyer to cancel the contract and receive a refund of their earnest money deposit. These contingencies typically include:
- Home inspection contingency: this allows the buyer to back out of the contract if the home inspection reveals serious problems.
- Appraisal contingency: this allows the buyer to back out of the contract if the appraisal of the home comes in below the purchase price.
- Financing contingency: allows the buyer to back out of the contract if they are unable to obtain financing for the purchase of the home.
If you back out of the contract for an approved contingency, you should be able to get your earnest money back. Remember, the contingencies have deadlines associated with them. It is very important that your attorney stays on top of these contingency dates for you.
However, if you back out of the contract for another reason, the seller may keep your earnest money for breach of contract.
It is important to note that the specific terms of your contract may vary. Also, if you are canceling for another reason you can also just ask for the seller’s consent for the return of the earnest money, however, if the seller disputes the cancellation, this can complicate the process.
It’s always best to attempt to reach a mutually acceptable resolution whenever possible, however, the last two options to try and get your earnest money back are negotiation where you negotiate with the seller to release your money, or small claims court. If you believe you have the right to get your money back, you can file a claim in a small claims court.
If you need help navigating a real estate transaction please contact us today to discuss your options and protect your rights.