Earnest Money Disputes: Feeling Bad About Your Good Faith?

Are you a prospective homebuyer in the Denver area? Did you think you found the perfect home, only to have an inspection or appraisal reveal that it had some structural issues or isn’t worth as much as you were led to believe? Even if you’ve entered into a Contract to Buy and Sell Real Estate, you can still back out of the purchase in the event of certain unintended circumstances, which are enumerated within the contract itself. If you do choose to terminate and you do so according to the contract, you are entitled to a return of your Earnest Money Contribution. Sometimes, though, the seller may fail to return your Earnest Money. What then? This Blog will walk you through getting a return on the money you’re entitled to.

What is the Earnest Money Contribution?

Earnest Money is a deposit made to a seller that represents a buyer’s good faith to buy a home. It is the amount that the buyer submits with the offer to show that they are “earnestly” interested in buying a home and it is usually applied towards the purchase price at closing. It is usually held by a third-party, such as a title insurance company (the Earnest Money Holder). The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing. In many ways, earnest money can be considered a deposit on a home, an escrow deposit, or good faith money. 

Can I terminate the Purchase Contract and get my Earnest Money Contribution back?

 Yes, as long as you effectively terminate according to the provisions and conditions in the Purchase Contract, you are entitled to a return of your Earnest Money Contribution. Common reasons for termination that are enumerated in the contract include, but are not limited to, issues with Title document objections, HOA document objections, new loan terminations, appraisal objections, survey objections, and inspection objections. There are several provisions, so the first step is making sure the reason you want to terminate is provided for in the contract.

How do I terminate and request a refund on my Earnest Money Contribution?

The Purchase Contract outlines how you can terminate the agreement with the seller. If your reason for termination is listed in the contract, then all you need to do is provide the seller with written notice to terminate. Your notice of termination must be received by the seller prior to the applicable deadline set forth in the contract. If it is not received in time, then the right to terminate is waived and the contract will be enforced.

Each termination provision provides for timing deadlines to get the written notification to the seller. This can be tricky as there are different dates for different types of terminations. Therefore, having an experienced attorney at GLO on your side will help make this process smoother. With extensive experience handling Purchase Contracts, GLO can help guide you through the process by determining whether you have a valid reason for termination, what the timing deadlines are for written notice, and providing said notice to the seller.

What if the Seller refuses to return my Earnest Money Contribution? How can I get my money back?

Unfortunately, sellers may still refuse to return your Earnest Money after you provide them with written notification of termination within the appropriate timeframe. As you probably guessed, the Purchase Contract also lays out steps that can be taken if the seller fails to, or outright refuses to, return your Earnest Money. The first step in an Earnest Money Dispute is usually for the parties to come together and try to work out an agreement. If an agreement is made, you will sign an Earnest Money Release and funds will be distributed accordingly.

However, if an agreement cannot be reached, the next step to be taken is mediation between you and the seller. Mediation will be completed before the parties enter into any arbitration or litigation. You will share the cost of mediation with the other party.

In addition, the Earnest Money Holder (the third-party holder of the deposit ) has three options: The Holder can (1) wait for litigation, (2) interplead and deposit the Money with the court, or (3) tell Buyer and Seller that if it does not receive a copy of the process (summons and complaint) within 120 days then it will release it back the Buyer. Whatever option they choose is in their sole discretion, so the main thing you should focus on as the buyer is coming to an agreement with the seller for your Earnest Money return.

What is Mediation?

If you’re not familiar with legal jargon, you may have no idea what a “mediation” actually is.  It’s really quite simple and you’ll be thankful that the Contract provides for them as the initial approach to the contract dispute. Mediation is a procedure in which opposing parties discuss their disputes with the assistance of a trained impartial third party who assists them in reaching a settlement. Mediation is not a lawsuit, but it is a precursor to filing suit. Therefore, mediation is probably included because lawsuits can be very expensive and timely. Mediation is less costly, and even though there are still fees associated with conducting a mediation, it’s probably going to be much less than formal legal proceedings.

GLO handles mediations for its clients on frequent basis and is more than happy to assist you with any questions or concerns you may have regarding the process, or help you if you wish to schedule a mediation with a stubborn seller. 

What consequences may the Seller face if they don’t return my Earnest Money?

In addition to being responsible for returning the entire Earnest Money Contribution, the seller may be held responsible for reasonable attorneys’ fees in the event of litigation. In other words, if you have to bring a lawsuit against your seller to enforce the contract to get your money back, the seller may be responsible for paying your litigation costs if the court decides in your favor. 

When may I not get my money back?

There are a few instances where the seller may be able to keep your Earnest Money, so it is important to keep them in mind. The seller will get to keep your Earnest Money if you decide not to go through with the home purchase for contingencies not listed in the Contract or if you fail to meet the timelines outlined in the Contract. You also will, of course, forfeit the Earnest Money deposit if you simply have a change of heart and decide not to buy. 

Therefore, it is so critical to make sure you’re abiding by the provisions of the Contract when you wish to terminate an agreement. GLO can help you through this process, from making sure your reasons for termination are expressly provided for in the Contract, providing proper written notice of termination to the seller within the particular timing deadlines, and scheduling mediations in the event of a seller’s failure to comply. 

One misstep may result in you forfeiting your Earnest Money, so having an attorney on your team will help you avoid these hazards. Fill out an interest form today to see if GLO can help you.

GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.