You might be under contract on a home or recently terminated a contract and wondering how the release of earnest money is handled.
While it is generally a straightforward process, it can get a bit murky.
Hopefully, this will answer some questions about the deposit, how to get it back, and what to do if you don’t get your deposit back after the contract is terminated.
What is earnest money, and when does it get returned?
In real estate, the earnest money is a deposit made to a seller to show that the buyer is serious about purchasing the property. A third party generally holds the earnest money, such as a title company, until the buyers and sellers close. If the buyer backs out of the sale, they may lose their deposit. If the seller backs out of the deal, they may have to refund the deposit to the buyer.
In essence, think of earnest money as a good faith payment. The more earnest money is in the offer, the more serious the buyer is.
However, there are instances in which the seller may not return the earnest money.
For example, if the buyer backs out before the option period ends, the buyer would receive the earnest money back in full. However, the seller keeps the funds if they back out after the option period due to cold-feet. Perhaps the seller fails to deliver on something outlined in the contract. The buyer could back out of the deal and get the earnest money back as well.
There is a wide range of reasons the contract could terminate, and it’s all covered on the TREC One to Four Family Residential Contract.
The process for returning earnest money.
You found a beautiful home, and the seller accepted your offer. Congratulations! However, you had a financing contingency that allows you to back out of the contract if your financing falls through in your bid. And it did. What now?
You have to submit a Notice of Buyer’s Termination of Contract form as a buyer. This is the formal notification to the seller that the buyer is backing out of the home purchase for whatever reason. Keep in mind; this notice does not state whether the deposit is returned one way or the other. This is just a notification that the buyer is backing out of the purchase. Remember, the contract determines if and when earnest money is returned.
Once the buyer or seller terminates the contract, the buyer will sign and submit a Release of Earnest Money form (TAR Form 1904) to the listing agent. This form is from the Texas Association of Realtors and not TREC. More on that in a minute.
After the seller signs the release, the form is then provided to the title company, releasing the earnest money to the buyer.
Sometimes, though, the release of earnest money is not so clear-cut and straightforward.
What happens if the seller does not release the deposit?
If the seller declines to release the earnest money, for whichever reason, then it is up to the courts.
Remember that offer you submitted? That’s a contract. It outlines the terms of the deal and any contingencies you as the buyer included. Sometimes the situation may not be clear, and both parties are unsure if the title company should release the earnest money.
Your best bet at this point is to reach out to a reputable real estate attorney to handle the matter. They’ll be able to look over your contract, listen to the details of the situation, and determine if you have a case.
TREC’s position on the matter.
TREC does not have authority over title companies (those who hold the earnest money). Nor do they get involved in earnest money disputes.
Rightfully so, at this point, the contract is what governs where the money goes, and if there’s a dispute over the contract and money, then you’ll have to take the seller to court.
Again, I stress that you should reach out to a real estate attorney. They will guide you through that process and provide sound advice.
TREC, the Texas Real Estate Commission, does not handle earnest money disputes. TREC also cannot determine how title companies will handle the release of earnest money policies.
To avoid confusion or complication with releasing your deposit, it’s best if you consult a real estate attorney who can review your contract and provide sound advice on what options you have available to you in this situation.
If you’re considering buying a property soon but haven’t yet found an agent, reach out today! I’d be happy to help guide you through finding the perfect home at the right price point.