The Earnest Money - Part 9What is Default, or Breach of Contract?The Earnest Money - Part 9What is Default, or Breach of Contract?*There are often opposing thoughts between the buyer and the seller, about what constitutes a default, or breach of contract, with the subsequent disposition of the earnest money.Some sellers think that if the transaction falls apart at any time, they will automatically get the earnest money. If you have read The Earnest Money - Part 6 How Do I Get the Earnest Money Back?, you know that there are many contingencies that must be met before the earnest money is at risk to go to the seller. It is most unlikely that the earnest money will go to the seller when the transaction falls apart early in the process, unless it is after all the contingencies have been met and waived.Some buyers believe that if the transaction does not go to closing, no matter what the reason, they automatically get the earnest money back. If you read The Earnest Money - Part 7 How Do I Lose The Earnest Money? , you will know that if you default as a buyer, or if you breach the contract, you almost for sure will lose the earnest money to the seller.So, what constitutes default, or breach of contract?**Starting with the earnest money, if the contract states that there is earnest money put up in a certain amount, and it is not tendered, that is a default of the contract.
If the earnest money check bounces after mutual acceptance, that constitutes a breach of contract. The contract says money was put up for earnest money and, in effect, it was not put up. There are remedies for this breach, but the seller and the sellers agent must be notified of this default and they have the choice to accept the remedy or rescind the agreement.If the buyer decides to back out of the contract based on the inspection, but does it after the days allowed for the inspection, that is a default.If the buyer says they are going to give a good faith effort to get financing, then do not do all the necessary steps to get approved for the loan, that can constitute a default.If the buyer does not close the transaction when they said they would, that is a default.If the buyer choses to not sign closing papers and close the loan and or the purchase, that is a default.When the buyer defaults, or breaches the contract, the earnest money goes to the seller as liquidated damages.( * Although there may be technical differences between default and breach of contract, I am not an attorney, and am making no distinction between the two.** I am not an attorney, and am not giving legal advice. Most real estate related law suits revolve around this question.)