Earnest Money: A Practical Look at What it is and What to do When the Deal Falls Through

With so many first-time home buyers in the Seattle area these days, we get lots of questions regarding earnest money deposits: What is earnest money? How much should I put down? Can I get it back if the deal falls through? Below you’ll find answers to these questions, as well as a brief guide in the event you’ve found yourself in a dispute over earnest money. Whether you are the buyer or the seller, we are here to help.

First, what is earnest money? Earnest money is a deposit submitted by the buyer in a real estate transaction to show the buyer’s good faith in carrying out the deal. It is basically the buyer’s way of showing they are serious about buying a house, and have the money to prove it. The amount of earnest money put down by a buyer is generally dictated by the real estate market at that time. In a hot sellers’ market the buyer may need to up their earnest money to 4 or 5% of the purchase price as part of a competitive offer. In a buyer’s market, the seller may be happy to receive $1,000 as earnest money. Generally, somewhere between 1-3% of the purchase price is a good amount to offer as earnest money. Keep in mind, though, there is no minimum amount or requirement.

Whatever the amount, at the time earnest money is deposited to the holder (whether it be an escrow company, an attorney, or a real estate agent) both the buyer and seller generally have expectations that everything will go smoothly and the parties will close on the agreed upon date. Unfortunately, for myriad reasons, deals fall through all the time. Depending on the reason the deal fails, the seller may be entitled to keep all the earnest money, or the buyer may have the right to get their earnest money back. The terms of the contract, and the reason the deal fell through, will dictate who gets to keep the earnest money. Smart buyers will include contingencies in their offers, including financing, inspection and title contingencies, allowing them to cancel the agreement in the event the contingencies are not satisfied.

However, with the way the Seattle market has been the last few years we have seen a lot of buyers waiving contingencies, only to find themselves fighting for their earnest money back weeks later, with little to no recourse. In the state of Washington, when the sale of a house falls through, the holder of the earnest money needs to receive directions agreed to in writing by both the buyer and the seller before releasing the earnest money to either party. Should both parties continue to disagree to whom the earnest money should go, the holder might decide to “send the money to interpleader.” This means the money is sent to the Court and a lawsuit is commenced to determine who gets it.

Just like every other type of lawsuit, an earnest money dispute can be really expensive. Not only does the losing party have to pay for the holder’s attorney’s fees, they may also be ordered to pay the attorney’s fees of the prevailing party. This is why it generally makes sense for most of our clients to find a way to split the earnest money in the event their deal falls through. This may mean 50/50, or it may mean 80/20. Each case is different, and the nuances of each transaction must be carefully analyzed.

When a new client calls us with an earnest money dispute we help them understand the strengths and weaknesses of their earnest money claims, what they may fairly expect to come away with, and ensure their strongest case is represented to the opposing side. Rarely does it make sense for a client to fight over their earnest money in Court, but every case is different, and sometimes there is just no way of getting around it.

Give us a call if you have found yourself in a dispute over earnest money and want to know where you stand.



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