One of the most popular blogs I’ve written revolves around what happens to the earnest money deposit when a buyer changes his mind after going to contract. This reminds us that, while everyone has likely heard of an earnest money deposit before, a little clarification is likely needed. Here's what happens when a buyer decides they no longer want to buy your home after beginning the process.
Here’s a scenario: A buyer competes to purchase a property and offers a large deposit to secure his interest in the home. This earnest money deposit, or EMD, is used to provide assurance to a seller that the buyer’s intent to purchase is legitimate and reliable. Furthermore, that check goes into an escrow account where it’s kept until settlement and applied toward the down payment for the home. In case the buyer fails to adhere to the commitment he’s made, the deposit becomes subject to potential forfeiture.
Related Articles:
- Everything You Need To Know About Earnest Money Deposits
- What's the difference between an earnest money deposit and a down payment?
- What is "Contingency"?
According to protocol, a seller takes his property off the market for anywhere from three to six weeks after accepting an offer. In doing so, he loses the opportunity to sell the property to somebody else. The buyer has locked up the property during this contingency period, usually for financing, home inspections, appraisal, etc. The seller’s only recourse if the buyer changes his mind is to retain the EMD and potentially to sue for specific performance for other damages.
In a multiple contract scenario, several buyers are bidding a property up and it’s usually in its first week on the market. If this happens and the buyer puts up a deposit but then changes his mind – essentially changes his intentions – and has already gone through releasing the contingencies that are built into the contract, the buyer could forfeit the deposit. In some states, forfeiture is automatic, and in others you have to go to court to obtain the deposit if the purchaser isn’t honorable. What that means is if a buyer puts up a $50,000 deposit, changes his mind, and is not willing to sign a release of the deposit to the seller, the seller will have to take legal action and sue the purchaser for specific performance to get the deposit released to the seller.
Specific performance means all parties agree to perform in a specific way in the transfer of the real estate and when the purchaser changes his mind, he is breaching that commitment. The case could go to a judge, who would order the deposit to the purchaser or the seller based on the circumstances and how well each party’s counsel presents the case. In the 3,000 homes I’ve sold over 30 years, I’ve seen four deposits forfeited and the sellers retained 100% of those deposits.
Buyers rarely lose their deposits. Why? Take an average contract where there might be home inspection, appraisal, and/or financing contingencies; there are multiple opportunities for a purchaser to exit the contract and get his deposit back – whether he isn’t able to get financing, he’s unhappy with the inspection report, or the appraisal comes in for less than the sales price.
Sellers, be careful to write very tight contracts with purchasers. Purchasers, if you’re not sure of the decision you’re making, be sure to include contingencies in the contract to protect yourself if there are potential problems about which you’re worried.
I represented buyers this year who had to compete against six other offers for a home they wanted. They offered a full five percent deposit on an $800,000 purchase price. They escalated to five percent above the asking price, waived an inspection contingency because the husband was handy, waived the financing contingency, and were willing to cure any deficiency in the appraised value if the property appraised for less than the sales price. Ultimately, it was the combination of these terms that won them the house, but they definitely took some risks and I guided them through that, advising them of the risks versus potential rewards. They were thrilled when I called to tell them that they won the house, and their offer was $20,000 less than the next offer. All of the other terms, together with the price, won them the house. If these purchasers changed their minds at any time, they risked losing their deposit. They counted the costs and were willing to take the risk, and all is good.
If you’re not sure how to structure your winning offer for a house, reach out to us at EricStewartGroup.com and we’ll connect you with one of our fine agents or locate one near where you are looking to buy. And check out our Buyer Savvy Guide below!
