Earnest money disputes are becoming more and more common in our heavily lopsided seller’s market.  When sellers have multiple offers to choose from, they expect the chosen buyer to fulfill the contract, and they’re much less likely to release earnest money when the buyer backs out.   When faced with an EM dispute, here’s what you need to know.

First of all, the earnest money holder (title company or brokerage) can’t decide who gets the money.  In many cases it’s abundantly clear that the buyer properly terminated for inspection reasons prior to the inspection objection deadline.  Even so, the sellers dig in their heels and refuse to sign an earnest money release.  In cases like that, even when it seems the seller is wrong, the earnest money holder cannot side with the buyer and release the funds to the buyer without seller consent.

Section 24 of the Contract to Buy and Sell dictates the process when there is an earnest money dispute.  The earnest money holder can do one of three things:

  1. Do nothing, and wait for the buyer and seller to bring a court order for disposition of the earnest money,
  2. File an interpleader action with the court and deposit the funds with the court, or
  3. Provide written notice that if no court action is brought to resolve the dispute, the earnest money holder will refund the money back to the buyer within 120 days.

In most cases, the earnest money holder will choose option No. 1, the “do nothing” option.   This is because option #2 would cost the earnest money holder money and time to file a court case, and option #3 only allows return of the funds to the seller.   Therefore, in most cases, either the buyer or the seller will need to take some sort of action if they want to hold on to the earnest money.

When you’re the buyer, a good starting point is to request that the earnest money holder issue the 120 day letter.   Once the 120 notice is issued, the only way the seller will be able to stop the earnest money holder from releasing the funds after 120 days would be to bring a court action.  Most sellers are not inclined to pay money to bring the court action.

If you’re the buyer that wants the money before 120 days, or if you’re the seller and you want the earnest money released to you, you’re going to have to begin the dispute resolution process.  The first step is to attempt to mediate.   Section 23 of the Contract to Buy and Sell states that the parties will attempt, in good faith, to mediate the dispute.   It’s in your best interest to provide a written request to mediate to the other party as soon as possible.  The written request starts the 30 day time clock on your mediation obligation.  Under Section 23, the obligation to mediate terminates automatically after 30 days from the date the request to mediate is delivered to the other party.

If the parties reach an agreement during mediation, they will then provide the agreement to the earnest money holder to release the funds.   If they don’t resolve the dispute through mediation, or they don’t mediate within the 30 days following a mediation request, one of the parties can then bring a court action.   If the earnest money is below $7,500 and there are no attorneys involved, either party can bring a claim in small claims court.  However, if there is attorney representation, or the earnest money is greater than $7,500, the case will need to be filed in county court.

Remember that earnest money disputes are between buyers and sellers, not real estate brokers.  Brokers involved in the transaction should inform their clients that they should seek advice from an attorney.