Resolving Earnest Money Disputes

Earnest money is an essential part of the process of purchasing real estate. In real estate, earnest money is a deposit a buyer makes to a seller as a show of good faith and commitment toward buying the property. Earnest money is a small percentage of the purchase price and is typically applied to the down payment or closing costs if the sale goes through. The typical earnest money deposit in California is between 1% to 3% of the sales price. Earnest money can often become a point of contention, resulting in disputes. In this article, we will discuss some of the common causes of earnest money disputes and options for resolving these disputes.

Common Causes of Earnest Money Disputes

Earnest money disputes occur for various reasons. These disputes can be frustrating for both buyers and sellers. It is vital to understand the common causes of earnest money disputes. The following are some of the common causes of earnest money disputes;

1. Buyer’s Change of Heart

One of the main causes of earnest money disputes is a buyer changing their mind about the purchase. If a buyer changes their mind, they may try to get their earnest money back. However, the seller may argue that the buyer is not entitled to a refund. This can lead to disputes, as both the seller and buyer may feel they are entitled to the deposit.

2. Unmet Contingencies

Often, real estate contracts contain contingencies. These are clauses buyers include when making an offer on a property that allows them to back out of the deal if the terms of the clauses are not met. Examples of contingencies include financing contingencies, appraisal contingencies, and inspection contingencies. If, for example, the property inspection reveals significant issues, the buyer may want their earnest back. However, the seller may be against the buyer getting their money back.

3. Breach of Contract

If either party is accused of breaching the contract, it may result in disputes over who is entitled to the earnest money deposit. For example, if the seller fails to disclose important information, the buyer may demand a refund of the deposit.

Resolving Earnest Money Disputes

Several options for resolving earnest money disputes are available for both buyers and sellers. The following are some of the options for resolving earnest money deposits;

1. Negotiating a Compromise

Negotiation is a quick, cost-effective option for resolving earnest money disputes. The buyer and seller may be willing to compromise to avoid a lengthy legal battle.

2. Mediation or Arbitration

If negotiation does not resolve the issue, ADR methods such as mediation or arbitration may be the next step. The real estate contract may even contain a clause that requires disputes to be resolved through ADR methods. Mediation involves a neutral third party (a mediator) helping the parties come to a mutually agreeable resolution, whereas arbitration involves a neutral third party hearing both sides of the story and making a binding decision regarding the issue.

3. Litigation

If none of the above options work, it may be necessary to pursue litigation, which involves bringing the dispute before a court for a judge to decide. Often, litigation is considered a last resort as it can be time-consuming and expensive.

Contact Us for Legal Help

If you’re dealing with an earnest money dispute, contact our qualified attorneys at SAC Attorneys LLP for legal help.