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Navigating Earnest Money Binder Disputes in Failed Deals
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Navigating Earnest Money Binder Disputes in Failed Deals

January 2, 2024 Real Estate Development, Sales and Leasing Industry Legal Blog

Reading Time: 4 minutes


Purchasing a home is one of the most important—and stressful—purchases a consumer makes. Oftentimes, the process is long, tedious, and nerve-racking. For first-time homebuyers, there are a lot of unknowns, and for sellers, there is much to consider to protect oneself and get the best money for your investment. Unfortunately, many times, sales fall through for a number of reasons, and what occurs thereafter is often not something that is contemplated before the process begins.

What is an Earnest Money Binder

An earnest money binder, also known as an earnest money deposit or a down payment, is a sum of money that a buyer puts down when making an offer to purchase real estate. It demonstrates the buyer’s seriousness and commitment to completing the transaction and is an amount that is negotiated by the parties. This amount is usually somewhere between 1-3% of the total purchase price. The earnest money binder is typically held in escrow by a neutral third party, such as one of the real estate agents or the title company where the transaction is projected to close. If the transaction does close, the earnest money binder is applied towards the total purchase price or the closing costs. If the transaction does not close, the earnest money binder then has the potential to be a topic of dispute.

If the Sale Falls Through

If a real estate transaction does not go through as planned, what happens to the earnest money binder typically depends on the specific terms outlined in the purchase and sale agreement and/or any addendums thereto. The purchase and sale agreement will often times dictate how the earnest money binder is distributed upon a sale not closing, as well as, what will occur in the face of a dispute over the distribution of the earnest money binder, including whether the parties can mediate, go to arbitration, or must file a lawsuit in civil court, as well as, whether a prevailing party in any dispute will be able to recover his or her attorney’s fees and costs.

Contingency Failure

Many times, a contract will state that it is dependent on some type of contingency. A contingency usually comes from the buyer’s side and can be either a financing contingency or some other type of contingency, such as the sale of the buyer’s current home finalizing simultaneously with the purchase of the new property. There are also inspection and appraisal contingencies that are provided in purchase and sale agreements. If a buyer’s contingencies are not met within the agreed-upon time frame, the buyer may have a right to cancel the contract and request a return of their earnest money binder. It’s crucial these cancellations are done timely and in the form the purchase and sale agreement require.

Seller or Buyer Default

If the seller fails to meet their obligations under the purchase and sale agreement, such as disclosing property defects or failing to perform agreed-upon repairs, the buyer may have a right to cancel the contract and request the return of their earnest money binder. However, if the buyer defaults on the contract without a valid reason as provided for in the purchase and sale agreement, the seller may be entitled to keep the earnest money binder as compensation for their time and expenses incurred during the pending transaction. The reason for cancelling a contract—either by the buyer or the seller—is often the main point of contention in an earnest money binder dispute.

In most cases, if the parties to a purchase and sale agreement do not agree as to the distribution of an earnest money binder, the neutral third party holding the earnest money binder must file what is called an interpleader action in civil court. This allows the parties to then litigate the property disposition of the earnest money binder in accordance with the purchase and sale agreement.

Conclusion

It is very important to contemplate what would happen to the earnest money binder prior to any dispute arising, so that you—as either a buyer or seller—can prepare to follow the contract’s terms, timelines, and requirements to best protect yourself. The litigation attorneys at Jimerson Birr can help you navigate the law in this area and assist you in the pursuit of a claim for an earnest money binder as either a seller or buyer.

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