How Do I Lose The Earnest Money?
The Earnest Money - Part 7
How Do I Lose The Earnest Money?
I work in the State of Washington, and we have standard Purchase and Sale forms for the entire state. On our Residential Real Estate Purchase and Sale Agreement is this language as item #8 on the first page:
Default (check only one) □ Forfeiture of Earnest Money or □ Seller’s Election of Remedies.
The definition of default is given under “P” on page 4 of the same form:
So defaulting on the contract is easy to understand, and hard to actually do!
Default means “If the buyer fails, without legal excuse, to complete the purchase of the Property.”
In The Earnest Money - Part 6, I explain all the points where you can legally back out of the Purchase and Sale Contract. There are at least 10 different times or stages where you can legally back out, and retain your earnest money.
So if you have failed, without legal excuse, to complete the purchase of the property, it usually means there was bad faith somewhere along the line. Perhaps another property came up during the last few days before closing that you liked better and you decided to bag this purchase. Perhaps you just changed your mind. Perhaps someone came into your life, whether a friend, family member, another sales person - and convinced you not to complete the purchase of the sale.
Occasionally the default occurs because of an event outside of your control. The job transfer fell through at the last minute. Your spouse was murdered during the last few days of the closing. Something catastrophic came up.
At that point you release the earnest money to the seller, sign a rescission agreement where you both release each other from the transaction, and move on.
A very small minority of people (one in seven thousand transactions) decide that even though they defaulted on the contract, they still want their earnest money back. That eventuality is covered in the contract language and in the law as well.
At that point, the seller is making a (legitimate) demand on the earnest money. The buyer is making (an illegitimate, in my opinion) demand on the earnest money as well.
The entity holding the earnest money (the escrow company, if you work with me) has up to 30 days to commence an inter-pleader action. The money is transferred to the State Trust Fund, and typically, both sides hire attorneys.
The Earnest Money - Part 7 How Do I Lose The Earnest Money?
The Earnest Money - Part 7
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