Earnest money is a small sum of “good faith money” that a buyer promises to hand over when their offer is accepted. If the deal falls through, the seller is often entitled to keep it to compensate them for their time. So, what happens when you come across a canceled earnest money check?
What Is Earnest Money?
Buyers include earnest money in good faith, kind of as a way of saying, “I want this deal to work, so let’s take it seriously. If it doesn’t go in your favor, you can keep the cash.” Of course, there are specific regulations that determine when and if a seller gets to keep the earnest money.
In most cases, the buyer will get the earnest money back in their pocket, but let’s review how earnest money is handled and how it’s determined who gets to keep it in the event that a real estate deal falls through.
Who Gets to Keep Earnest Money?
Ideally, an earnest money check is cashed as soon as can be, but the money shouldn’t be handed over to the seller. Instead, the agent or other mediator is responsible for putting that money into escrow, as there are certain circumstances where the buyer may get it back.
If the deal works out, the earnest money should be applied in full to the buyer’s down payment or closing costs. If the deal falls through, regulations determine whether it goes back to the buyer or is handed over to the seller. Until that moment, escrow keeps the funds safe.
When the Buyer Gets the Earnest Money Back
Generally, a buyer will have all the earnest money returned to them if the deal falls through for any reason that they have outlined in the contract.
For instance, if the buyer made their offer “contingent upon inspection” and the seller agreed to this contingency, the buyer can back out after the home inspection, citing issues that the inspection uncovered. In this instance and any similar instance, the buyer should get the full earnest money deposit back, the contract is void, and the seller has to find another buyer.
Since just about every buyer will include some sort of contingency in their contract to protect their interests, earnest money is easily returnable in most situations. If the buyer gets the earnest money back, they can expect a check or deposit into their account within a few days.
When the Seller Gets to Keep the Earnest Money
If a buyer backs out of the deal for any reason that isn’t outlined in the contract, the seller generally gets to keep the full earnest money deposit as a means of compensating them for the time their home was off the market.
When a buyer is considering backing out of a real estate deal, it’s essential that they take the time to review their contractual obligations to determine whether or not they can expect their earnest money back. Their agent can also help provide guidance as to what will happen to the earnest money.
Is It Possible to Cancel Earnest Money?
An earnest money deposit is often a small sum, typically $1,000, that a buyer makes in good faith — at least, they’re supposed to. A personal check offers more ways “out” for a buyer, which is why some agents are now advising or even requiring cashier’s checks for earnest money deposits and other elements of the transaction to increase security. Still, if you accepted a personal check for earnest money, there are a number of ways the buyer could cancel it.
A buyer can ask their bank to “stop payment” on a personal check at any point, though it’s easiest to do before the payee has presented the check to their bank. Still, in the three to five days it takes a check to clear after being deposited, a buyer can still request a stop payment. They’ll likely be charged a fee to do this (ranging from $0 to $35), but it’s one way for them to “cancel” the earnest money deposit and get their money back.
Another way a buyer can try canceling an earnest money check is by causing the check to bounce, intentionally or unintentionally. If the payee goes to cash a personal check and the buyer doesn’t have the money in that account, the check will “bounce” and that will be the end of it — the seller won’t get their earnest money.
How to Handle a Canceled Earnest Money Check
A canceled earnest money check can create an extremely frustrating experience for any seller and their agent. After all, earnest money represents a small amount of compensation for a seller who has taken their home off the market for however long, only to have the offer fall through.
Contractual Obligations
Technically, a buyer is contractually obligated to give the seller the promised earnest money if the deal falls through for any reason other than through an “out” the buyer outlined in the contract (i.e., a home inspection contingency). This means that, if a seller wanted to, they could take the buyer to civil court and demand them to pay up.
Unfortunately, this is rarely worthwhile, especially if the seller is soon to be moving long distance once their home does sell. Given that earnest money is typically only a small sum, it makes it even less worthwhile.
Moreover, most contracts include wording that declares the agreement “null and void” if the buyer fails to deposit earnest money — and the buyer could argue that if the check bounces or a stop payment was made to cancel it, they never actually deposited it, and therefore the contract wasn’t valid at all.
Prevention Tactics
Ultimately, it can be very hard to find recourse when an earnest money check is canceled, which is why depositing the earnest money as soon as possible should be standard practice. Still, that alone can’t prevent such problems from happening.
Managing earnest money and all the paperwork, conversations, and questions in between is a real balancing act. The right digital solution can take a lot of the legwork out of your day. LemonBrew Abstract offers title insurance, closing, and escrow services that make for a seamless, stress-free closing process from start to finish. Not only is our service game-changing, but we also offer LemonBrew Pay as a seamless digital platform to transfer money for closing costs. Learn more about how LemonBrew is revolutionizing real estate transactions.
