It is not uncommon for real estate transactions to have contingencies. A buyer may present an offer contingent on completing an inspection, selling another property, or securing financing. But what happens when one of there is an issue during one of these contingencies? Perhaps the other property never sells, or the buyer and seller disagree about how to address an issue discovered during the inspection. What happens when the buyer demands the seller return their earnest money?

What exactly is earnest money?

Earnest money is the payment of a portion of the price of the property for the purpose of binding the contract. This benefits the buyer, as the seller has agreed not to accept other offers and to the seller, as it reduces the risk the buyer will back out of the deal.

What can I do to reduce the risk of a dispute over the earnest money?

There are provisions that you can include within the real estate documents that help protect your interests. One example, referred to as the “sue or shut up” clause, allows the buyer greater control over the escrow funds. This provision essentially states that the escrow agent will return the funds to the buyer upon the buyer’s request unless the seller initiates a lawsuit within a clear amount of time. The seller could fight for the funds, but it reduces the risk of unreasonable disputes.  

You can better ensure you have power over the real estate transaction, or at least fully understand the risks of the arrangement, by having real estate documents drafted to your transaction or reviewed by someone representing your interests. A boilerplate document may not address these issues and could leave you vulnerable.