Mediation vs. Arbitration: Which Option is Better for Resolving Earnest Money Disputes?

Earnest money deposit (EMD) is an amount a buyer gives to a seller to represent their good faith to purchase the property. It can be considered good faith money. Once a buyer gives an EMD to the seller, the funds are held in an escrow account until the deal is closed, after which the money will be applied to the buyer’s down payment and closing costs once both parties agree.

Unfortunately, sometimes, real estate deals fall apart. One of the most contentious issues that can arise when a real estate deal falls apart is the fate of the EMD. After a real estate deal falls apart, disputes can arise over whether the buyer should get the money back or if the seller is entitled to keep it. When a dispute arises over earnest money, there are several methods of resolving the issue. Apart from litigation, common alternatives include mediation and arbitration. To determine the most appropriate path, it is crucial to understand the differences between the two and the benefits and drawbacks of each process.

What is Mediation?

Resolving an earnest money dispute through mediation involves working with a neutral third party familiar with such disputes to reach a mutually agreeable resolution. This neutral third party is called a mediator. The mediator’s role is to facilitate open communication between the disputing parties and guide negotiations. The mediator does not impose a decision on the parties.

Advantages of mediation include;

• Cost-effectiveness: Mediation is generally less costly than litigation and other dispute resolution methods, including arbitration.
• Faster resolution: Parties can resolve their dispute in a matter of hours or days
• Control over outcome: Mediation allows parties to maintain control over the resolution.
• Confidentiality: Mediation is private, and the details of what is discussed during the sessions and the outcome are not made public.
• Preservation of relationships: Open communication and cooperation can help maintain or repair the relationship between the parties.

However, while mediation has several benefits, it also has drawbacks. For instance, if power imbalances exist, it may result in an unfair agreement. Also, if parties are unwilling to cooperate, mediation may fail.

What is Arbitration?

Arbitration involves working with a neutral third party called an arbitrator or a panel of arbitrators. Unlike mediation, which allows parties to make the final decision, arbitration grants the arbitrator or panel of arbitrators the authority to render a binding decision after listening to both sides.

Advantages of arbitration include;

• Binding decision: The ruling is final and legally enforceable, offering closure to the parties
• Privacy: Arbitration leads to a private resolution
• Less costly: Often, arbitration is a lot less expensive than litigation
• Quicker resolution: Arbitration offers a quicker resolution than litigation

Which Option Is Better?

Whether you should choose mediation or arbitration to resolve your earnest money dispute depends on the specifics of your case. For instance, mediation may be best if both parties are willing to cooperate, you want to preserve the relationship, and you want a more cost-effective option that allows for creative and flexible solutions. On the other hand, it may be best to choose arbitration if you want a binding decision, the dispute involves complex legal matters, or mediation has failed. A qualified real estate attorney can advise you accordingly.

Contact Us for Legal Help

If you are dealing with an earnest money dispute and need help determining the best option for resolving the issue, contact our skilled San Francisco real estate attorneys at SAC Attorneys LLP for guidance.