What is Earnest Money in a Real Estate Sale?

Earnest Money is a security to the seller and implies the intention of the buyer’s purchase in good faith. Earnest money is credited towards the closing or total cost of the purchase. If a seller terminates the transaction the earnest money is returned to the buyer. When the buyer terminates the transaction or fails to secure financing, the earnest money is usually forfeited by the buyer.

The terms of the earnest money are mostly decided upon a contract between both the buyer and the seller.

1. What happens if the buyer and seller deal fails? Let's say the deal fails. There is no formal contract discussing the earnest money Deposit. The deal is referred to the broker. If the broker agrees that the seller is entitled to the earnest money, the buyer will be notified of forfeiture within ten days. The buyer may hire an Attorney or take it to the Texas Real Estate Commission. It’s never good to have a deal fail and thus is very important to have everything in black and white.
2. What happens to the earnest money deposited if the deal fails? The Texas Real Estate Commission has outlined rules regarding the disbursement of funds by the Broker as follows;
   1. Look at the contract: A broker may only disburse money from the broker's trust account in accordance with the contract.
   2. Make a demand for payment: If the buyer or seller makes a written demand for payment of earnest money, the broker must pay the earnest money to the party entitled to the money. A broker must do this within a reasonable time, not later than the 30th day after the date the demand is made.
   3. Make a second contract: The parties can make a second agreement to decide how to disburse earnest money funds. They can send the second agreement to the broker, who then has to release the funds within 30 days from the demand.
   4. The broker must immediately notify all parties in writing of any disbursement of earnest money under subsections (2) or (3).
   5. Go to court to get an order for release of earnest money: If the broker cannot reasonably determine to which party or parties the earnest money should be paid, the broker may pay the earnest money into the registry of a court and interplead the parties. A lawsuit will begin.
3. Records. A broker must maintain all documentation regarding a trust account for four years from the date the document is received or created by the broker.
4. If the deal does not go through, would the realtor still be paid a commission for his/her work in the property sale? No, the Realtor won’t be entitled to any commission, otherwise mutually agreed by both the parties prior to the transaction.

DISCLAIMER:

Gagan Khan is a Real Estate Attorney licensed to practice in the State of Texas, please be advised that the article above is for educational purposes only and may not be substituted for legal advice, for more information please contact us at: 832-930-1529 or visit us at www.gagan.law.