Ernest Money is something that a good deposit buyer makes when submitting an offer to a home. It is designed to show sellers who are serious about buying, and usually ranges from 1% to 3% of the purchase price. Money is held in escrow and usually applies to buyer closure fees or down payments. However, if the transaction collapses, the seller is entitled to maintain it depending on the terms of the contract.
So, can the seller maintain a legally serious money deposit? Short answer: If the buyer does not meet the terms of the contract without a valid and agreed reason.
Below, this Redfin article breaks down the situations within the rights of a seller to maintain serious money, and examples to understand it all.
1. Buyer violates the contract period
A real estate contract is more than just a price and date. It outlines specific obligations to both buyers and sellers. If the buyer unintentionally acts outside the scope of the contract and as a result, the transaction collapses, it can be considered a breach of contract. If the violation is not protected by unforeseen circumstances, the seller may have the right to maintain serious money as compensation for missing time and missed opportunities.
Violations include a wide range of actions, including:
Access properties without permission. Performing unauthorized inspections or repairs. Move or store your belongings or belongings early without formal written agreement. Change the financing structure (such as a traditional loan to an FHA) without written consent. Failed to deliver required documents (such as evidence of updated funds and pre-approval of loans) for each contract period.
Example scenario:
Buyer’s agreement requires you to provide a mortgage commitment letter by a specific date. They switch lenders to mid-process and don’t notify sellers. This will delay loan approval and miss the financing deadline. Sellers are entitled to serious money because they violated the terms of the contract and did not request an extension.
2. Buyers will retreat from the transaction without contingency
Most real estate contracts include contingency. This is a built-in condition that sales must meet in order to advance. These include funding, home inspections, and valuation contingencies. If the buyer is separated from transactions other than their protection, they often violate the contract and the seller is entitled to serious money.
Example scenario:
Buyers abandon the urgency of inspections to make the offer more competitive. They then discovered a small problem during an informal walkthrough and decided to withdraw from the deal. They didn’t have the urgency of the inspection in place, so the seller may be entitled to maintain serious money.
3. Buyer misses contract deadline
Real estate contracts have a strict timeline for completing inspections, raising funds, and serious money submissions. If the buyer fails to meet one of these deadlines and does not formally request an extension or terminate the contract based on a valid contingency, the seller may have a basis to maintain the deposit.
Example scenario:
Under this agreement, the buyer will give 10 days to complete the inspection of the house. They fail to schedule it on time and try to retreat from the transaction on the 15th day, citing inspection concerns. With the deadline passed and the extension not approved, the seller can claim that they are entitled to serious money.
4. Buyer fails to close without a valid reason
Delays in closures can occur for a variety of reasons, but not all legally acceptable excuses. Simply gaining cold feet, failing to manage poor time or slow paperwork usually doesn’t allow missed closing dates. Buyers are expected to arrive at a fully prepared closure. Funding has been secured, all contingencies have been met, and the required documentation has been completed.
If the delay is not covered by any unforeseen circumstances or unless the parties agree to a written extension, a buyer may be subject to a serious money deposit. In these cases, the seller has the right to maintain the deposit as compensation for lost time and to maintain the disruption caused by failed transactions.
Example scenario:
All preparations for the closure are complete, but buyers ask that the closure be delayed for several weeks. The seller rejected the request, and the buyer decided to retreat the transaction. There are no contingent or written contracts allowing delays, so the seller is usually entitled to maintain serious money as compensation.
When will buyers get serious money back?
Buyers are usually entitled to a serious money deposit refund if the seller retreats from the contract or returns from a home purchase for reasons protected by the contingencies outlined in the contract. These contingencies act as legal safeguards, but must be included in your purchase agreement to apply.
These generally include:
Test Contingency: Testing reveals serious problems and buyers cancel within the emergency response window. Rating Contingency: Home is below the offer price and sellers do not adjust. Funding Emergency: Buyers are unable to secure a loan despite reasonable efforts. Title Contingency: Legal issues with the title of a house prevent the sale from progressing.
It is important that buyers act within the timeline specified in the contract and provide appropriate notifications when invoking contingencies. If you run out of deadlines or fail to follow the procedures, you could potentially confiscate your serious money, even if the reason for your backout seems valid.
Who decides what happens to serious money?
Until both The Buyer and Seller agree to their distribution, Earning Money will be held by neutral third parties, such as the Title Company and Escrow Agent. In the event of a dispute, the funds will remain in escrow until resolved through negotiation, mediation or legal action.
Ultimately, it comes down to what is written in the contract and whether the buyer acted in good faith. Buyers who back out for a contract protected and valid reason will usually get their money back. Otherwise, the seller may have the right to maintain it.
