Signing a purchase contract offer on a home and giving it to a seller is a serious deal and one you should not take lightly. If a seller accepts your offer, he usually pulls his listing and quits marketing the home for sale. To put a homeowner at ease, you should offer an earnest money, or good faith, deposit, when you submit the offer. If the sale falls through, whether or not you get this money back depends on the reason.
Earnest Money Basics
Earnest money tells a homeowner you are serious about your commitment to get a loan and complete the purchase of his home. The homeowner's broker typically deposits the money in an escrow account and it becomes part of your down payment when you close on the sale. States have different limits on earnest money deposits. However, the real issue is how much money is enough to make the seller comfortable. Common deposits range from $1,000 to $10,000, depending on the value of the home and how much demand there is for it. Sellers may expect more good faith money when there is more interest in their property.
As the buyer, you typically have the right to get your earnest money back if the seller cancels the contract. This is why the earnest money is held in escrow until he meets his contractual obligations toward the sale. Your real estate agent should also include language in your contract that voids it if you can't secure a loan by a certain date, including if your lender's appraisal comes in low, or if the home inspection reveals major problems. You should get the money back in these cases as well.
A seller typically has the right to keep your money if you break your purchase contract. Details about the earnest money are included in the contract. When you break the terms of your contract, the seller experiences hardship and financial loss because he had to keep paying on his home while waiting for you to close. He may have also missed out on another buying opportunity. Offering the smallest amount you can to get a signed contract can minimize your risks.
Even though a seller has the right to keep your earnest money when you break the contract, you should try to communicate with him through your agent. Some homeowners may be more understanding and willing to negotiate. If your earnest amount was more than the homeowner's estimate of his financial loss resulting from the missed sale, he might agree to return some of the money. Typically, a seller's real estate agent would manage the distribution of the money from escrow based on what the seller agrees to.
Sellers actually have the right to pursue legal action against you to recoup financial damages when you break a real estate contract, even if you paid earnest money. If the seller believes his losses exceeded your earnest deposit, he can sue. However, many states have said sellers cannot both keep your deposit and sue. State Bar of Wisconsin legal writer Alex de Grand discussed Wisconsin Supreme Court decisions that support a seller's right to pick one remedy or the other in his July 2009 article "Disappointed seller of real estate can’t keep earnest money and sue breaching buyer."
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.