Earnest monies - Who gets? (Knoxville: sales, real estate, condo)
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The buyer is trying to back out of purchasing our condo. Who / what happens to the earnest monies? We've taken our condo off of the market for over three weeks now and have turned people away that were interested. Here's what our contract says concerning the earnest monies. We live in Knoxville, TN
The earnest money section reads:
Buery has paid or will pay within 3 days after the Binding Agreement Date to ----("Holder") located at -----, an Earnest Money deposit of $XXXX by check. Holder shall disburse Earnest Money only as follows:
(a) at closing to be applied as a credit toward Buyer's Purchase Price;
(b) upon a written agreement signed by all parties having an interest in the funds;
(c) upon order of a court or arbitrator having jurisdiction over any dispute involving the Earnest Money;
(d) upon a reasonable interpretation of the Agreement; or
(c) upon the filing of an interpleader action with payment to be made to the clerk of the court having jurisdiction over the matter
It depends on the reason for the "No Sale". Should be in your contract with buyer.
Smartin99, did the buyer simply change his mind or was there an inspection problem or other difficulty with the property that was not evident when the offer was accepted?
If the buyer simply changed his mind without a sound justification for walking away, the earnest money should go to the seller. It is escrowed to protect the seller from just that type of scenario. The seller may have lost another buyer because the house was off the market thinking that it was sold. Therefore, seller keeps the earnest money.
However, if something shows up in the inspection that the buyer did not know about or does not want to have fixed (many times the remedy is not good enough for the buyer), the earnest money should be returned to the buyer. Especially, in the case where there was a defect that was not disclosed by the seller. Then, dishonesty was involved.
Also, if the buyer is unable to obtain financing for the property, then the sales agreement almost always requires the seller to return the earnest money. This is one of those things that is out of the buyer's control.
If the buyer was unable to secure a mortgage, you might want to require that the next potential buyer be pre-approved for a mortgage sufficient to cover the selling price of your property.
In short, if it was a case of buyer's remorse and no other logical reason for backing out, then the seller should retain the money. Good reason for no sale - seller forfeits, or in some situations splits the earnest money with the failed buyer.
The inspection revealed an upstairs window that needed to be replaced. I've already had that done and the buyer signed off on the inspection agreement stating all was ok.
On a side note, the bit you mentioned about the buyer being unable to secure a mortgage and getting their earnest monies back is a surprise. I thought once the contract was signed that outside of anything dishonest on the sellers part, if the buyer pulls out, or even couldn't qualify for a mortgage, the earnest monies goes to the seller. I've had this condo off of the market for approaching a month and many people have come to me personally that were interested. I had to turn them away. What protects me then?
Smartin99, that is why I suggested that you require your real estate agent to be sure that the prospective buyers be pre-qualified for a mortgage.
This means that the home seeker will go to a bank or mortgage company, due the full financial disclosure and the lending institution will give them a document stating that the borrower is pre-approved for $XXXXXX.00 for a mortgage.
This way your agent will not even bring anyone through your condo who is not already secure financially to buy and who does not meet the lender's approval.
This protects you from signing an agreement of sale only to find out 3 weeks later that your buyer cannot get a mortgage large enough to buy your property. If you did not make it a requirement in the first place, he is usually held blameless for the failed sale.
This is true in any state that we have lived in and was the case last fall when we were looking for properties in Blount County.
Do you have a personal real estate agent that you can check with or is this a Sale By Owner?
It is also a good idea to have a pre-listing inspection so that you are able to correct anything, which it sounds like you did, prior to even showing the property.
There are several real estate agents who post on this forum and will most likely add their comments also. I am not an agent and there could be something in your situation that they would spot instantly that could be in your favor.
Have you thought of checking into the Real Estate Forum here on C-D, as well? You will find many well qualified posters there. You can click on the link below to go to Real Estate under General Forums.
Did you not have a financing contingency? That gives the buyers x number of days to secure financing (they can specify exactly what kind and at what rate) and if they cannot, then you can either extend the contract, write a new contract or void the contract.
Contingency clauses are fondly known as "weasel clauses" or "out clauses," because they give buyers all kinds of ways to get out of buying the property without losing their earnest money. Once a buyer removes all contingencies-- for financing, home inspection, sale of other property, etc.-- then the contract must proceed as stated. If the buyer backs out after that point, they generally forfeit their deposit, unless the contract specifies otherwise or the seller agrees to refund it. Does this help?
To my knowledge, if there was no financing contingency in the contract, then the buyer can't just walk away without forfeiting the earnest money, even if he or she can't get financing. If there is a significant amount at hand, and there are no contingencies unmet, and no other viable escape clauses, I would call your real estate agent and say that you expect to have the escrow company remit the proceeds to you.
If there is the slightest hesitation or equivocation, I would add that you will be running the contract by a real estate attorney just to make sure you fully understand it. Then do just that. A hour of the attorney's time will probably be no more than $200, and it may well save you thousands.
What is the buyers reasoning for backing out? Bill and I once had ernest money on a condo, as the closing date approached, Bill had health problems and ended up having surgery that repuired 6 weeks of bed rest. We were still in NY at the time and had no way to get here to Tn. to close or move. So we ended up backing out of the deal and once the seller cooled off he gave us our ernest money back.
But my understanding is if there aren't reasons stated in the contract for clauses for the buyer to back out, then the buyer loses the ernest money. I'm not in real estate and I could be way off base. What does your realtor say?
Yes, if the buyer signs a non-contingent contract, then they have to close by the date specified or they lose their deposit, unless the seller agrees to refund it. But earnest deposits are often as little as $500 or $1000 in Knoxville, and legal fees could easily surpass that. So the seller could well get the short end of the stick twice-- when the buyer walks and when they don't release their earnest money.
A lot depends on how the parties agreed to release the money (if both parties must sign the release form) and who holds the funds. If this is airtight upfront, the buyer is at risk; if not...
A guy I worked with, who had zero real estate sense or experience, put down $15,000 earnest money on an A frame in Alaska. Once we talked some sense into him (there were serious issues), he walked. He also lost the earnest money, as there were no unmet contingencies.
I have heard of earnest money deposits being refunded when people just walked, leaving the sellers seething. In every case I know of, the real estate people were "holding the check," and simply returned it. Another reason for insisting on a formal escrow with a third party.
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