Can A Seller Keep Buyers Earnest Money?

keep earnest moneyIf you are involved in a real estate purchase and sale agreement where a potential buyer has backed out of an offer to purchase a property, you probably want to know who can keep buyers earnest money that was offered as part of their purchase offer.

What is Earnest Money?

Earnest money is a deposit a home buyer submits with an offer to buy a property.  The purpose is to show a buyer that you are serious about purchasing the property and the higher the earnest money amount is, the more likely it is that your offer will be accepted.  “Earnest” is an old fashioned word to mean your “serious” about purchasing a property.  The earnest money funds can also be referred to as a “good faith” deposit and are often held by a third party escrow company as part of the purchase and sale transaction.

How Much Should A Buyer Offer in Earnest Money?

The amount to offer in earnest money really depends on the type of transaction you are involved in and the competitiveness of the market you are in.  The Seattle Metro market is currently hyper competitive so it would be advisable for a buyer to offer more in earnest money if they really want a property so show the buyer you mean business. Typically it is normal to see an earnest money deposit of 1-3% of your offered purchase price but keep in mind, having a higher earnest money offer could make the difference of a seller accepting an offer or not.

What Happens to the Earnest Money if the Purchase and Sale Transaction is Not Completed?

If an offer to buy a home is accepted by a seller, then the earnest money paid as part of the offer would be applied to the purchase price.  If however, the buyer backs out of the sale or the seller changes their mind, that could trigger a series of events that would leave the earnest money paid in flux.

Most purchase and sale agreements in real estate include several contingencies that allow a buyer to back out of a transaction and allowing the buyer to receive their earnest money back.  These contingencies include stating that the offer is subject to the buyer obtaining mortgage financing within a certain time period or home inspections that could reveal defects in the property.  In a hot real estate market such as Seattle, Washington, buyers are increasingly making all cash offers and waiving contingencies in order to get their offer accepted by sellers.  This is very beneficial to sellers as they could now be in a better position to be entitled to the earnest money should the sale not go through.

Earnest money deposits are governed in Washington, State by RCW 64.04.220. Should the purchase and sale transaction not go through it would be up to the party who feels they are entitled to earnest money paid to make a written demand for all or any part of the earnest money held by the holder (typically Escrow Company).  The holder must then within fifteen days of receipt of the written demand:

(1) Notify all other parties to the transaction of the demand in writing

(2) release the earnest money to one or more of the parties; or

(3) Commence an interpleader action.

RCW 64.04.220 further states that “the holder’s notice to the other parties must include a copy of the demand and advise the other parties that: (a) They have twenty days from the date of the holder’s notice to notify the holder in writing of their objection to the release of the earnest money; and (b) their failure to deliver a timely written objection will result in the holder releasing the earnest money to the demanding party in accordance with the demand upon expiration of the twenty-day period. The holder’s notice must also specify an address where written objections to the release of the earnest money must be sent.
(4) The twenty-day period commences upon the date the holder places the holder’s notice in the United States postal service mail and sends an email …”

What is an Interpleader Action?

An interpleader action is a civil action, much like a complaint filed to begin a lawsuit in which the holder will initiate a legal case in civil court naming the buyer and seller as defendants in which they can litigate a case over who is entitled to the earnest money paid while the holder is entitled to a reasonable attorney fee for having to file the interpleader action.  The earnest money in question will be deposited with the court where the interpleader action is filed.

Ideally the buyer and seller will be able to work out any problems among themselves before having to deal with an interpleader action and potentially incur further costs, however some disputes may not be able to be resolved causing this issue to have to be litigated within the civil court.

If you live in Washington State and are looking for assistance with dealing with a purchase and sale agreement gone wrong involving who can keep earnest money, give Symmes Law Group a call at 206-682-7975 to speak to a real estate attorney today.

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