Real Estate Questions Answered Here
by Art Santellen, REALTOR®
Q: Is there such an agreement in real estate, to verbally agree to buy a house with earnest money deposit to seller. In New Jersey, if seller agrees to the sell the house for appraised value and the buyer agrees and then backs out, is the seller legally obligated to refund earnest money deposit? I really need this info in a hurry. Thanking you in advance.
A: Wow!, I'm impressed. A question from cyberspace that originated in New Jersey.
First of all, I am not familiar with real estate law or real estate practice in New Jersey. Besides, I'm not an attorney and I really can't give you a legal opinion.
However, here in Colorado there are at least 8 ways for a buyer to terminate a real estate contract and still get their earnest money returned. "Backing out" of a deal is not officially one of these.
In Colorado paragraph 10 of the standard real estate contract allows the buyer the opportunity to inspect the physical condition of the property by a certain date. That date is called the Physical Objection Deadline. The form used in Colorado to notify the seller that the buyer has found something wrong with the physical condition of the property has space to list any number of things like a leaking roof or broken window. It also has a little block the buyer can check off that says, in effect, "I don't want to buy your property and I'm not going to tell you why."
A little check mark next to this block has the effect of allowing the buyer to back out of a deal for any reason suitable to the buyer and the buyer doesn't have to tell the seller the reason.
A bit later in the standard Colorado contract, there is a paragraph that says, in effect, "if this contract terminates for any reason, then all things of value (like earnest money) are returned to the person who deposited them." In spite of this legal language, people do get heartburn when deals fall through. That's why county courts in Colorado have a special judge that listens to people (buyers and sellers) argue (with legal representation) why they should get their earnest money back or why they should keep the earnest money.
Again, in Colorado, both buyer and seller agree to mediate their differences before suing each other. I have been asked to be a technical advisor to a mediation hearing where the buyer and seller disagreed on, you guessed it, who keeps the earnest money. In that case, the buyer and seller agreed to split the earnest money equally among themselves. In the long run, it was cheaper than a court hearing and both parties were equally dissatisfied. After all, being equally dissatisfied is a good definition for a settlement in which neither person loses.
Remember, earnest money is nothing more than a buyer's fiscal display of being sincere about buying a piece of real estate. It's not automatically the seller's money to keep if the deal falls through. It's not money that belongs to either the listing or selling broker. It's money that belongs to the buyer to be ultimately used (if needed) to help pay some of the buyer's closing costs. Otherwise, it's returned to the buyer at closing.
There is another related issue. Again, in Colorado there is a paragraph that talks about exactly the situation your raised in your email: what happens if either the buyer or seller "backs out" of the deal.
This paragraph gives the buyer (person making the initial offer to buy) an option. If the buyer backs out the deal they can either walk away from their earnest money (liquidated damages) or they can agree to be sued in court for damages and/or be forced to buy the property (specific performance). Most people prefer to walk away from their earnest money.
Interestingly, the seller doesn't have that option. If, after going under contract, the seller decides he really doesn't want to sell their property, the Colorado sales contract only give him one option: get ready to be sued for damages and be forced to sell your property (specific performance).
Clearly, neither party should be cavalier about signing a contract unless each is wholeheartedly prepared to perform under the terms of the contract.
Just one more thing. It's best if buyer earnest money is deposited or held by a disinterested third party like a title company, closing company, or closing attorney.
In your specific case, you may want to consult an attorney for legal advice on real estate law in your state. Thanks for the email.
Next week, another question about buying/selling real estate and getting a home loan which I promise to answer next week, right here, in Hispania News.
Art Santellen is a licensed real estate professional with Intrepid Realty in Colorado Springs.
News Flash: Art is also a Home Mortgage Consultant with Wells Fargo Home Mortgage!! If you have a question you'd like answered, please send them to Art care of Hispania News PO Box 15116, Colorado Springs, CO 80935. You may also send your question directly at Art via email at ASantellen@hotmail.com. Or call him at his Wells Fargo Office: (719) 381-1114.