Deposit money up for grabs when home deal fails

Dear Steve,

Dear Earnest,
It should have been there by now. It may just be a simple paperwork snafu, or you may be waiting awhile longer, especially if the "scorned" seller does not see eye to eye with your rationale for deep-sixing the deal. Your agent should be able to get to the bottom of it pretty quickly.

First, readers should know that earnest money is a deposit that a real estate buyer makes to an escrow agent when signing a contract to purchase property. It is literally designed to show the "earnestness" the buyer has for closing a deal. The amount can range from under 1 percent to as high as 10 percent. But 5 percent on a $200,000 house equals $10,000, or what most folks would refer to as "serious money." Eventually, the earnest money will be applied to the home's sale price.

But if the transaction does not close successfully, the return of the earnest deposit depends primarily on exactly what the contract states and why the deal fell apart.

The contract spells out, or at least it should spell out, under what circumstances the buyer or the seller can void the contract. These reasons are called "contingencies."

If a prospective buyer elects to not complete the transaction for a contractually illegitimate reason, the buyer could forfeit the earnest money and the seller may lay claim to it as compensation for all that time the property was off the market.

Those contingencies usually proscribe certain deadlines and methods of notification that also must be strictly followed.

It could very well be, Mr. Awaiting, you were tardy in meeting the inspection or response deadlines set out in the contract, in which case the seller may try to pocket the deposit, says real estate attorney Gary W. Neilsen of Park City, Utah.

If this isn't the case, then we will assume you made your objections known to the seller following the inspection, whereupon the seller could either remedy them, release you from your contract, or claim your contentions are frivolous, which could land you in small-claims or other civil court. Most sellers will release the buyer when push comes to shove, but not always, Neilsen adds.

Note that the escrow agent, be it a title company, real estate agent or other agent, can't release these monies based on just a request from either the buyer or the seller. The agent is legally bound to require either written authorization from both parties or an order from a court of law directing their disposition to do that.

If there is a dispute, Utah and many other states have a mediation provision that the two parties and escrow company can easily activate. If you still can't come to terms with the seller, then there's always the court option, which can be quite expensive, explains Neilsen. "It might be too expensive with just $5,000 or even $10,000 at stake," he says.

Hopefully, you have the check in hand by now. But as in the contract, you want to provide for contingencies.

-- Posted: July 3, 2004