Earnest Money Disputes

Earnest Money in the real estate industry is usually described as “liquidated damages.” In other words it is designed as a remedy for losses to the seller in the event the buyer is not able to perform, or if they just change their mind and bail out. In most transactions, sellers automatically assume that they will get their hands on the earnest money in case of a buyer default.  That is simply not the case. There are usually too many barriers (contingencies) for that to happen so simply, and too many buyers who make demands on the money, even though they clearly are not entitled to get it back. The flip side to that is when sellers make a demand for the money, even though contingencies cannot be satisfied and the money is supposed to be returned to the buyer.

In the Spokane market, buyers have historically been cheap-skates when it comes to earnest money and even though the current market is a very strong sellers market, buyers continue to offer meager amounts of earnest money and many sellers still accept such paltry offerings. Old habits die hard!

In the case of an earnest money dispute, whoever holds the earnest money is obligated to interplead the money into court if the parties cannot come to an agreement. The judge then “splits the baby” as they see fit and the parties pay their respective attorneys.  There is never a winner when it goes to court!

In a recent case called T&B Washington Inc. V.  Dullanty & Sawyer, the parties spent $50,000 each to recover a $3,000 earnest money. In the first decision, the buyer was awarded $36,000 in attorney fees, but  when the seller appealed neither side recovered attorney fees. Pride sometimes has a huge price tag. I guess it was the principle of the thing!

If you are a buyer, consider this question. Why offer any earnest money at all, if the seller will never be able to get their hands on it? That might be more honest. Or, if you want to make your offer stand out from the stingy crowd in this competitive market, make a generous offering of earnest money that is more readily available to the seller! Why do you think the seller should assume all of the risk in a transaction? Be willing to share that risk in order to make your offer more palatable to the seller.