What Happens to Earnest Money When a Deal Falls Apart?

When a deal falls apart, what happens to the earnest money? We’re going over that exact situation today.

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Today we are answering a question from VIP client Rick Swanson. He asked, “What happens to my earnest money if my home sale falls through?” That’s a great question, Rick. We’ve got a $25 gift card coming your way. Now let’s get to the answer.

Obviously, this isn’t the ideal situation to be in. Let’s start at the beginning. Earnest money is a good-faith deposit that a buyer makes when they write an offer on a home. This is the consideration at stake that makes the contract valid. This sum must be secured in the form of wired funds, a certified check, or a personal check. Cash won’t work for the bank.

Now, the purchase and sale agreement details the obligations for both buyers and sellers. When one party doesn’t perform their obligation, we can get to a point where the buyer and seller agree to disagree and the deal falls through. 

When this happens, we execute a rescission agreement. This requires both parties to agree on earnest money disposition. We identify why the deal is falling through, where the earnest money goes, and make sure all bills are accounted for. Unpaid bills are usually taken out of the earnest money.

If both parties cannot agree on a solution, there are a few different remedies. Here are the possible solutions:

1. The broker holding the earnest money can dictate the disposition of the earnest money and decide who they want to give it do. 
2. Mediate internally. This is the method I prefer.
3. Hiring a professional mediator to work with both parties to come to an agreement.
4. Hiring an arbitrator to give a binding agreement for the disposition of the earnest money.
5. Let the buyer and seller duke it out in a court of law.

I prefer internal mediation.

A good Realtor should be able to help you avoid this type of situation by setting realistic expectations and staying in constant contact. If you do get into a situation like this, however, they are the best people to help you out. If you have any questions for us, don’t hesitate to reach out to us. If we pick your question, we’ll send you a $25 gift card, too. I look forward to hearing from you.