Understanding Earnest Money Disputes: What Buyers and Sellers Need to Know

For homeowners in Colorado's real estate market, the initial excitement of buying or selling a property often comes with a tangible commitment: earnest money. This deposit, submitted by the buyer, serves as a demonstration of serious intent.

The implications of misunderstanding earnest money rules are significant, risking the loss of your deposit as a buyer or protracted legal battles as a seller. Colorado real estate contracts contain precise conditions, strict deadlines, and defined paths for dispute resolution that govern whether earnest money can be reclaimed or forfeited. GLO specializes in guiding Colorado homeowners, providing the essential knowledge to navigate earnest money issues that ultimately protect your financial interests in real estate transactions.

What is Earnest Money?

Earnest money is a sum of money a homebuyer gives to a seller to demonstrate their serious intent to purchase a property. A misunderstanding of earnest money can lead to the loss of a significant deposit or an inability to properly claim earnest money when a deal unravels.

When Can You Lose Earnest Money?

The Colorado Contract to Buy and Sell Real Estate includes various provisions that allow a buyer to terminate the agreement and recover their earnest money if certain conditions are not met. These "escape clauses" are critical safeguards and typically include objections related to title documents, HOA documents, loan approval, appraisal value, property survey issues, and the all-important home inspection findings. For a homeowner (buyer), the risk is first, assuming that any reason for wanting out of the deal will warrant a refund. The contract is precise; only specific termination reasons outlined within its terms will allow for earnest money recovery.

Missing a deadline, can legally waive the buyer's right to terminate based on that specific contingency, making the contract fully enforceable and potentially leading to the forfeiture of the earnest money if the buyer still chooses not to proceed. For instance, if a buyer finds significant issues during the home inspection but fails to deliver a written inspection objection notice to the seller before the designated deadline, their right to terminate based on those issues is gone, and withdrawing from the contract thereafter could mean losing their deposit. Read our blog 3 Common Issues in Real Estate Transactions: the Home Inspection, Earnest Money, and Party Wall Agreements to understand other common issues in real estate transactions.

How Can You Get Earnest Money Back?

The Colorado Contract to Buy and Sell Real Estate outlines a specific hierarchy for resolving Earnest Money conflicts, beginning with negotiation. If both parties can agree on who is entitled to the funds, a formal Earnest Money Release document is signed, allowing the escrow agent (the Earnest Money Holder, often the title company) to distribute the funds.

If negotiation fails, the contract typically mandates mediation as the next step. Mediation is an informal process where a neutral third party facilitates communication and helps both sides reach a mutually agreeable resolution. While less costly and time-consuming than litigation, it still involves legal arguments and strategic positioning. The inherent risk for homeowners here is attempting to navigate mediation without legal counsel, potentially undermining their position or failing to identify viable settlement options. Furthermore, the Earnest Money Holder itself faces a legal dilemma. If they receive conflicting demands for the earnest money, they are legally bound to hold the funds until the dispute is resolved. Their options include waiting for the parties to reach an agreement, inter-pleading the funds with the court (depositing the money with the court and letting a judge decide ownership, which involves legal fees for the holder), or, in some cases, releasing funds to the buyer if no formal legal action (summons and complaint) is initiated by the seller within a specified timeframe (e.g., 120 days).

How GLO Can Help

At GLO, our experienced real estate attorneys provide strategic legal support to help buyers and sellers understand their rights, avoid forfeiture, and resolve conflicts efficiently.

We carefully review your Purchase Contract to clarify when termination is permitted and what conditions must be met to recover or retain earnest money. If a dispute arises, we negotiate on your behalf or represent you in mediation, working to secure a fair outcome while minimizing stress and legal expense. With GLO’s guidance, you gain the clarity and protection needed to manage earnest money issues with confidence and avoid costly surprises at closing. Learn more about how GLO can help with your earnest money situation by visiting Understanding Earnest Money and Your Rights.

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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 signed fee agreements. GLO does not guarantee any results