Earnest Money

Earnest money is a deposit made by buyers to demonstrate serious intent to purchase a property. The deposit is held in escrow until closing or contract termination. Earnest money protects sellers from buyers who make offers without genuine intent to close. It also creates financial stakes that keep transactions moving forward.

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How It Works

When it’s paid: Typically within 3 business days of contract execution. Missing this deadline may constitute breach of contract. How much: Usually 1-3% of purchase price. Where it goes: Deposited into an escrow account held by the title company. Neither buyer nor seller can access funds until contract terms authorize release. At closing: Earnest money applies toward the buyer’s funds due at closing. It reduces the amount needed at the closing table but does not reduce the purchase price.

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When Earnest Money Is Protected

Earnest money is returned to buyers when transactions terminate for valid contractual reasons.

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When Earnest Money Is at Risk

Earnest money may be forfeited to the seller when buyers breach the contract without valid contingency protection. Common scenarios:

• Buyer changes mind after contingencies expire
• Buyer misses critical contract deadlines
• Buyer refuses to close after all conditions are met
• Buyer waived contingencies and issues arise in those areas
• Buyer cannot obtain financing after waiving financing contingency

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Disputes

When buyers and sellers disagree about who should receive earnest money, the title company cannot release funds without:

• Written agreement from both parties
• Court order
• Mediation or arbitration decision (if required by contract)

Disputed funds remain in escrow until resolved. The contract typically specifies dispute resolution procedures. Common dispute scenarios:

• Buyer claims valid contingency; seller disagrees
• Disagreement about whether deadlines were met
• Disputes over inspection negotiation outcomes
• Questions about good faith effort on financing

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Protecting Earnest Money

Verify wire instructions: Earnest money is a prime target for wire fraud. Always verify wire instructions by phone using a number from the title company’s website or contract documents, never from an email. Document everything: Keep copies of all contract documents, addendums, and communications. Documentation matters if disputes arise. Meet deadlines: Contingency protections expire. Missing inspection or financing deadlines may forfeit protections even if valid issues exist.

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Questions to Ask

“When is earnest money due and how do I submit it?” Clarifies deadline and acceptable payment methods (wire, certified check, etc.). “How is earnest money held and protected?” Confirms escrow procedures and insurance coverage. “What happens to earnest money if the transaction doesn’t close?” Understand the release process and potential dispute procedures. “How do you communicate wire instructions?” Verify the company uses secure methods, not email-only communication.

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