who gets the down money when a buyer backs out?

Asked by Hannah, East Greenbush, NY Sat Aug 4, 2007

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Keith Sorem, Agent, Glendale, CA
Sun Aug 5, 2007
Maybe this will help:
The purchase contract will gpverm what happens. If it is not in writing, then it won't happen
Are you a principle in this transaction, or is this hypothetical?

Based on your profile I am going assuming that you are a first time buyer (if that is wrong, then please repost)
When you make an offer on a property, the seller wants to see that you are serious. Part of that demonstration is showing the seller that you are able to pay for the property, usually a letter from a lender stating you are qualifed.
Also, it is customary for a deposit to be made. Different areas of the country have different customs and terms. This initial deposit in California, where I work, is normally three percent of the purchase price. The buyer can offer more, however three percent is sort of the minimum.

This deposit means a couple of things. While your offer is being considered your Realtor (representing you, the buyers) holds onto your check. Once the offer is accepted, escrow is opened and the check is deposited with a neutral third party. In some states it an escrow company, in others it is a title company that performs the escrow duties. The purpose of esrow is to make sure that both parties carry out their duties agreed to in the contract, and at the end of the transaction, one party receives the deed and the keys, the other party the proceeds from the sale.

During the escrow period there are duties that are required of both parties. The buyer does inspections (physical, wood destroying pest, etc.) and the seller is required to provide information (Natural Hazard Disclosure, Lead Based Paint, Title report, etc.). The deadlines stated in the contract control what happens by when.

Usually, if the buyer backs out of the contract after say the physical inspection, or the property does not appraise for the dollar amount of the sale, or the buyer ends up not qualifying for financing, the seller will refund their inital deposit.

However, AFTER the final contingency item has been removed, the buyer is pretty much on the hook. (Of course, you can always hiire an attorney.:)

(again , this is not legal advie). Every time the seller provides the buyer with a new disclosure (say, the wood destroying pest inspection report), that report gives the buyer THREE days to consider the report and\, if they want, cancel.

This is one of the reasons that Realtors represent buyers and sellers. The two Realtors do not have an emotional link to the transaction. Their job is to look out for the best interests of the buyer and seller, and come up with a fair bargain. This means if the wood destroying pest report require repairs, asuuming everything else is in agreement, the Realtors will help the buyer and seller negotiate a fair deal on who fixes what and pays how much.

Again, I do not know your local laws. However, in general, most of the time the contracts are formulated to protect the interest of both buyers and sellers. Once a property is "in escrow", that means that it is no longer "for sale". Because the seller has removed his property from the market, he can no longer solicit new offers. In some cases it is possible for the seller to prove damages and the buyer may not receive all of their initial deposit. For example, if they had agreed for the appraisal to be completed within ten days after signing, and the appraisal is not completed, the seller could opt to cancel the contract, and perhaps say"My property has been off the market for ten days, I want you to pay me $500 to compensate me".

A second payment is made which is the "down payment" to enable the buyer to qualify for a loan. This money is normally deposited after the appraisal and loan approval have been granted. The date the money is due is stated in the contract. Sometimes it's possible for the buyer to qualify for the loan, the appraisal to be approved, but for some reason the buyer does not have or will not provide the deposit. In this case, the "liquidated damages" might exceed the amount of the inital deposit (it depends what the contract says). Most lenders are requiring 10-20% down, with the current loan programs.

That would mean that after ALL the inspections are completed, and while the "behind the scenes" work is being completed, the final deposit is made. In California there is a final inspection three days prior to the turnover of the property. This inspection is to verfiy that the property is in substantially the same condition as when escrow opened. One of our agents did a final walkthrough and a hot water heater burst, the entire house was flooded, and the wood floors had warped. The family had moved out. (a great reason to purchase home warranty protection for sellers). The seller had to replace the floors. The buyer could have backed out because of the changed condition of the property...and probably could have received their deposit(s) back.

Hope this helps.
4 votes
Melissa Manc…, Agent, Plainville, MA
Sun Aug 5, 2007
Hi There,

Most of the agreements here in MA state that if a buyer backs out of a transaction for any reason other than the contingencies within the agreement that the escrow deposit (money down) will be split between the seller and their agent. A release from the buyer has to be signed in order for this to happen. If the buyer refuses to sign this document than the escrow agent holding the deposit has to instructed by a court on how to handle it. In some cases, the legal fees that the listing agent/or seller will incur to go to court, exceed the deposit being held. When this occurs, the seller usually will agree to give it back to the buyer to avoid this process all together. Additionally, the buyer can also risk being sued for "non-performance" and be liable to damages in addition to the waiver of the deposit. At times there is language protecting the buyer from this. You would be best served by consulting an attorney and having them review your contract. Best of luck to you!

Melissa Mancini, Realtor, CBR, GRI

Melissa Mancini, Realtor, CBR, GRI
Web Reference:  http://MelissaBMancini.com
4 votes
Deborah Madey, Agent, Brick, NJ
Sun Aug 5, 2007
The terms of the contract dictate what will happen with monies deposited. I assume you are referring to deposits held in escrow. Generally, if the contract is subject to contingenicies, deposit monies will be refunded if the contingency is not met. A contract can be written with a non-refundable deposit, although that is by far the exception, not the rule.

If a buyer backs out without cause, the deposit monies can be used to offset seller damages. I have seen part of a buyers deposit returned and part allocated to the seller. When the seller could easily find another buyer and be made whole again by that new contract, the buyer received part of their deposit back. It was a substantial deposit and a new replacement contract was quickly put in place. This was a negotiated agreement, not a court order.

Bottom line......everything is negotiable. The buyer deposit is an assurance to the seller that the buyer will perform. It is possible for the buyer to forfeit an entire deposit if the buyer backs out.
3 votes
Ellen Chung, , San Mateo, CA
Sat Aug 4, 2007
If you are truly referring to the earnest deposit, which is the initial deposit you put down when you get into contract for a house, generally the buyer receives the deposit back if: 1) Loan contingency has not been removed yet, 2) Appraisal contingency has not yet been removed, 3) Inspection contingency has not been removed yet. It really depends on what exactly it says in your contract, but usually sellers do not have a problem returning the earnest deposit as long as there is no foul play or unreasonable requests by the buyer.

If you are referring to the down payment for the house, then the buyer absolutely gets it "back." Since the buyer doesn't actually pay the down payment until it's closer to the end of escrow, the buyer doesn't have to worry about any loss of down payment. Hope this helps! Read your contract carefully and discuss it with your realtor--they should be able to tell you whether or not you will get your down back.
Web Reference:  http://www.simpluxe.com
3 votes
Jogusto, , Santa Cruz, CA
Sat Aug 18, 2007
London Realty and Timothy Spain gave the best answers because they mention the small problem of getting release of the money from the Seller if you want to back out. I lost money in a deal because the seller concealed a history of water damage and repairs which were claimed against his insurance. As a result, I found out the property was essentially uninsurable for 3 years. I basically was shut out of the purchase by this.

Although we notified the seller within the time allowed for buyers contingencies, the seller refused to release the deposit. He basically held us for ransom until we agreed to give him some of the money. You see, the real trick in getting the deposit back is in the finagling with the seller to agree to it. If they are unreasonable, then you are basically in Lawyer-land and it is going to rapidly cost you money to get that money back. In my case, I lost $14000 out of $27000 because the seller was unreasonable. Also, my Realtor was helpless in this situation. Just because you have a Realtor, doesn't mean you are safe from experiencing this kind of trouble.

I learned from this experience. Try to get a mediation/arbitration clause in your contract, and then, if you have a dispute, do not pay a lawyer thru the nose prior to going to the non-binding mediation. Wait until the arbitration phase for that. Again, my Realtor had no idea how to handle an actual dispute in mediation, and could give me no good advice, and I've learned to be much more hard-boiled about this process as a result.
1 vote
Bill Fung, Agent, Centennial, CO
Wed Aug 15, 2007
Handling Real Estate Earnest Money Deposits

Hannah, when buying real estate, the path from contract to closing depends on the laws and customs in your area. In some states, attorneys do title searches and act as closing agents. In other states your paperwork might be processed by a title company.

With all the differences in real estate transactions from state to state, there's no way to give you a one answer fits all scenario. If I am correct, it's best you check with a Pennsylvania real estate attorney for your specific location. That said, here are a few general tips that might help you avoid problems no matter where you live.

Good Faith or Earnest Money Deposits
A good faith deposit, also called earnest money, is money you give to a seller when you sign an offer to purchase. By making this deposit, it shows the seller that you are serious (earnest) about buying the property, and until the deal closes the earnest money still belongs to you, not the seller, unless your contract "an offer" to buy says otherwise.

Your offer should always state what happens to the earnest money if the deal falls through.

Most of the time, the earnest money deposit is returned to the buyer if any of the buyer's contingencies cannot be met, example; problems with financing or a home inspecton that shows the home needs more repairs than you thought.

Earnest money often goes to the seller if you back out of the contract for "no good reason".

Most real estate agents are required to use their state's sanctioned real estate contracts that usually has approved wording that describes what happens to the money if a real estate transaction falls through.

Attorneys might use standard contracts or write their own. If you use generic forms purchased from stationary stores or online real estate contract websites; to make an offer to a seller, make sure it is written in a way that protects your rights to the earnest money deposit.

Where Does the Money Go?
The earnest money deposit is credited to you when your real estate transaction closes--You now own the property. Congratulations it's your home now.

Check Your State Laws
Again, your state's real estate contract will tell you who gets the earnest money when a certain event happens, keep in mind, a refund might not be automatic. Check to see if both parties must agree in writing before a deposit held in trust can be given to either party.

If you want more information on just the buying process itself. Click on the link below to receive free no obligation articls on the home buying process. Best of luck to you. Bill
1 vote
Carolyne Cal…, Agent, Bozeman, MT
Sun Aug 5, 2007
The question is a little vague. Why does the buyer want to pull out? Did the buyer and the seller meet all other cirteria of the contract? Were the dates met? The answer to the question is that it depends on the way the contract is written. Most often I have seen the buyer get all the earnest money back. I always have a title company hold the money during the escrow period, and if there is a dispute it is clearly written into the contract that that sum may become an advance for the cost and fees required for filing any action.
1 vote
Carhoptogeth…, Home Buyer, Philadelphia, PA
Wed Feb 8, 2017
my parents accepted an offer on their home with $2,000 earnest money. They backed out of the contract a few days to the deadline. They are asking for the money back. My parents didn't make the house payment for two months and used the money for moving expenses. Do my parents have the right to the money? We have a signed document
0 votes
Gary Swank, Agent, Pittsburgh, PA
Sun Jan 25, 2015
Depends on the circumstances under which the buyer cancelled.
0 votes
The circumstances were that they changed there mind.
Flag Sat Nov 7, 2015
Lonnie, Home Seller, Philadelphia, PA
Sat Jul 20, 2013
A deposit was given to take real estate off the market until the balance of down payment could be given. Is this money owed to buyer if they back out?
0 votes
Dennis London, Agent, Pembroke Pines, FL
Wed Aug 15, 2007
This will vary by State, but the answer is always in the Contract that is executed by the Seller and Buyer. Once the Contract is fully executed, the deposit belongs to both the Seller and the Buyer and cannot be released except by agreement of the parties. If the parties cannot agree then there will be a dispute and each State has their own guidelines for solving Escrow Disputes.
0 votes
Timothy Spain, Agent, Bryn Mawr, PA
Mon Aug 6, 2007
It depends on the agreement of sale provisions. If there was a default then the money should go to the seller. However, if the buyer has meet his obligations with regards to preformance of the contract they should get back the earnest money. Either case no money will be released without the parties agreeing to the release of the funds.
0 votes
Bruce Lynn, Agent, Coppell, TX
Sun Aug 5, 2007
You have to look at your contract provisions. Typically I would say the seller gets it, but there may be instances that the buyer would get it back, depending on when they backed out. If they backed out during the option or "FREE LOOK" period then typically they'd get it back. If there was a contingency for financing or sale of another home, they might get it back. What does your contract say and what are the circumstances.
Web Reference:  http://www.teamlynn.com
0 votes
The Hagley G…, Agent, Pleasanton, CA
Sat Aug 4, 2007
It depends on why the buyer is backing out. The buyer has a certain period of time to inspect the property. If he/she backs out within the alloted period of time for legitimate reasons (as outlined in the purchase agreement) the buyer gets his/her earnest money refunded.
Web Reference:  http://www.cindihagley.com
0 votes
Robert Kroon, , Phoenix, AZ
Sat Aug 4, 2007
A question of definition here. "Down Money".....I assume you are really talking about Earnest Money. Down Payment is the sum of money required by the lender and is not normally payed / collected until the sale is closed .....Close of Escrow in certain states. Earnest money typically accomanies the sale contract as ......" I'm serious here." So we would not be talking about down money as by definition that would be payed only if / when the sale is going to close.

I agree with Carrie about the disposition ........sometimes the "out" is not as clear cut, but those murky cases must be judged individually.
0 votes
Carrie Crowe…, Agent, Southaven, MS
Sat Aug 4, 2007
If the buyer defaults the seller gets the money. If the buyer gets out during an inspection period or because his financing fell through, the buyer usually get his money back. Hope this helps, if you have more questions make another post or feel free to call.
Web Reference:  http://carriecrowell.com
0 votes
i am confused ...i am in charge of selling my parents home which is in distress but in california is worth something. I have a broker there and had s singned contract before the open house it was suggested we cancel it i did now three days later the escrow has not been deposited the good faith deposit was 15000. the seller is backing out well has not put escow money in. my broker wants me to sign a contract that it is a mutual agreement of cancellation but i was told the 15000 would still be mine. im very confused and really dont want to sign anything.
Flag Thu May 5, 2016
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