Earnest Money Disputes
By Jim Palmer Jr.

When a buyer makes a written offer to a seller it usually comes with an earnest money provision. That means they put up a token amount of money that will act as liquidated damages in the event the transaction fails to close because of the fault of the buyer. Historically speaking, in our region the monetary amount that buyers have been risking is a minimal amount in my opinion. That fact may have something to do with extended periods of time where buyers have had more leverage than sellers, but as the market has become more intense and difficult for buyers, we have seen those numbers rising, just so buyers can compete in this market. Offering a larger earnest money and even non-refundable portions of that earnest money have made the difference for many buyers who have won out in bidding wars simply because they were willing to put more skin in the game.

State-of-the-art purchase agreements have closed a lot of loop holes that existed in the past, making the likely-hood of an earnest money dispute less likely, but we still see situations where the party that clearly deserves the earnest money does not get satisfied and a dispute arises. When that happens, brokers and even Designated Brokers try hard to negotiate a resolution before the parties get to the point where litigation seems to be the only way to resolve the dispute. Just like in any legal battle, there are always two sides to the story, each with compelling arguments that they are the right one.

In a real estate transaction that has flubbed, and parties cannot agree on who gets the earnest money, it has to be interpleaded into court. When that happens, the closer or broker who holds the earnest money must leave it up to a judge to “split the baby” or to decide who gets the whole sum. Because of the high cost of court fees, meager earnest money amounts are usually gobbled up and no one really wins.

Some sellers make the case that “If they can’t get it, no one will”, so they allow it to be taken to court knowing that they will never see a dime and in fact may have to pay some court costs that are not covered by the earnest money.