It’s not a good time to look at this issue from a hindsight perspective. In a hot market, the instances of the seller wanting to keep your Earnest Money are lower. When there’s another buyer standing in line behind you, sellers aren’t as desperate. But when the market is slow, and they have few buyers, or only one, the offers are coming in few and further in between. This is the time that you will see more sellers wanting to keep that Earnest Money.
Step 1) The amount of the Earnest Money. When a buyer makes an offer they, they are required to put up “Earnest Money.” Many buyers want to know what the amount is; however, this isn’t the way you should be looking at it. You should look at it as, “how much money am i willing to lose?” The purpose of Earnest Money is to show the seller that you are making the offer “in earnest” and willing to proceed to closing. Do not write an Earnest Money check expecting to get it back should you change your mind. Sellers might keep the money and not give it back.
You should only write that check for an amount more than you are willing to lose, in case you change your mind about buying that house. The seller and seller’s agent may counter and ask for more, as they should if it is low. But don’t agree to an increased amount unless you are willing to lose that amount.
Step 2) Choosing Your Closing Agent (Escrow). In a Seller’s Market you will often see instructions from the seller’s agent regarding which Title and Escrow Company you are to use when writing an offer. In a hot market you likely won’t want to lose the house arguing over this point. But when your offer is the only one going for the seller long enough to feel comfortable that you can bargain in a reasonable manner, choose your escrow company wisely.
Whether it is the Closing Agent or the Real Estate Broker holding your Earnest Money, you want to make sure that they honor unilateral rights to cancel before you agree to make out that check. Sometimes the buyer has a unilateral right to cancel, but the escrow holder has an “internal policy” of requiring the signatures of both parties to release the Earnest Money.
Many, if not most, very large escrow companies do not want to take the risk of releasing the Earnest Money to the buyer unless the seller agrees. Sometimes you need the seller to agree and sometimes you don’t. If the escrow holder won’t give you the money because of their internal policy vs. the Purchase and Sale Agreement, you may find yourself talking to a wall instead of getting your money back.
Pick not only your escrow company, but also speak with your closing agent before writing that Earnest Money check. If you have an Inspection Contingency, ask for the form that you would use to cancel based on the Inspection Contingency.
Whatever your legal outs, know that most will expire early in the contract. So mark down the drop dead dates of your rights within these legal outs. Notice whether or not the form requires only your signature to release the Earnest Money, or the signatures of both the buyer and the seller. Let’s assume that these forms only require the signature of the buyer, and the buyer has the unilateral right to cancel. Now call the proposed Earnest Money holder and verify that they will in fact return your Earnest Money with only your signature in case you cancel.
Do not rely on your Finance Contingency as a means to change your mind. Return of Earnest Money based on the Finance Contingency is rarely, if ever, covered under a unilateral rescission right, as are some other areas of the contract. Often if not always, the seller needs to agree to the release of Earnest Money if you are canceling based on the Finance Contingency. It’s a good idea to be sure you can get a mortgage before making an offer.
3) When you should lose your Earnest Money. If you change your mind about buying the house because you have now decided you don’t want it, the seller should keep your Earnest Money. That is the purpose of requiring Earnest Money. You promise to buy the seller’s house, and if you change your mind he gets to keep the Earnest Money. That is what Earnest Money is all about.
Some will say the seller wasn’t damaged, so why should he keep my money? You have two elections in the contract. The seller doesn’t have to prove he was damaged, nor does he even have to be damaged. To talk about damages, you have to have been willing to risk more than the Earnest Money at the time you made the offer, and most people don’t do that.
So, should you lose your earnest money?
You will see more and more sellers wanting to keep that money than in the past; this is because buyers are not as easy to come by as they were in the last few years. Before you go to an attorney to get your Earnest Money back, maybe you should first look at yourself in the mirror and ask yourself if the seller should get to keep it. Because remember, Earnest Money is there to assure the seller that you are going to buy the home; if you don’t, understand that its not fair to them to lose a deal because you changed your mind.
Check out this article for more information on Understanding the Earnest Money Deposit, and, When Does the Earnest Money Deposit Get Paid to the Seller?