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Who gets to keep the earnest money a real estate deal falls through?

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My answer: While I’ve talked in the past about the cost of a failed house deal, I’ve never really dealt directly with the issue of earnest money. In case you’re not aware, the whole point of earnest money, which a prospective buyer typically pays to the seller when they make an offer on a property, is to ensure that the buyer is serious, and intends to go through with the deal. Thus, if the buyer backs out of the deal, the seller gets to keep the earnest money. If the deal goes through, the funds are applied to the purchase at closing. Of course, there are possible exceptions, like when the buyer makes their offer contingent on securing financing, the outcome of the home inspection, etc. But for the most part, if a deal falls through and it’s the buyer’s fault, the seller keeps the cash. Of course, the seller could also try to sue for ‘performance’ (i.e., to make the buyer honor the contract) but the most common thing to do is pocket the earnest money and put your house back on the ... more
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Earnest money, like any other part of a real estate contract, is a negotiable item, and can be written into a contract such that the money either passes to the seller or reverts back the buyer in the event the deals falls through.

While it is customary for earnest money to be pledged when an offer on real estate is made, it is not required, nor does it automatically pass to the seller if the deal falls through.

An important part of any real estate contract is the part which determines how a breach is handled. Sellers want a clause in their contracts to specify that in case the buyer pulls out for a reason not covered in the contract the seller gets the earnest money. Buyers want a clause which gives them the earnest money back no matter why they pull out.  Again, it's all negotiable and the one who can negotiate the best contract will usually be the most secure in the transaction.

Craig Grella · answered over a year ago
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