People put money into an escrow account for a variety of reasons, but one of the most common is to make an offer to buy a house. In most cases, the potential buyer puts some money in escrow as a deposit to show he's serious about buying the home. Also called "earnest money," this deposit gets applied to the cost of the home after the sale goes through. If the buyer does not complete the sale, however, he could lose his escrow deposit.
When a buyer and seller agree upon terms of a sale, they write up a sales contract. If a real estate agent is involved in the transaction, she is the one to do this. This does not mean the house is sold; it simply means there is an agreement to sell. It is standard practice in most areas for the potential buyer to offer a small payment to show he is serious about buying the property and to compensate the seller for lost time and marketing opportunities should the sale not be completed. This deposit goes into an escrow account.
Most real estate contracts contain contingencies, or conditions that spell out reasons either party can cancel the contract. Common contingencies deal with home inspections, appraisals, the buyer getting financing and the buyer being able to sell his home first. A potential buyer who cancels the sale because one of the contingencies was triggered is entitled to recover his escrow deposit. For example, if the house appraises at less than the sales price and the seller refuses to lower the price, the buyer is within his rights to cancel the contract, and the seller is not entitled to keep the earnest money.
Failure to Fulfill Contract Terms
If the potential buyer fails to hold up his end of the deal and the reason is not covered by the contingencies spelled out in the contract, he will likely lose his escrow deposit. For example, if the buyer finds another house he likes better or that has a better price, he would have to forfeit his escrow deposit to get out of the contract he has signed on the first house.
A buyer should make sure he has found the house he wants before signing a sales contract and putting down earnest money. Also, buyers should make sure the contract includes as many contingencies as possible, including being able to cancel the contract if they cannot secure financing or cannot sell another property they own. If a situation arises that's not covered in the contract, such as loss of a job or a family issue that prevents the sale from going through, it never hurts to ask for earnest money back. Even though the seller may not be required to give back the money, he may be willing to relinquish some or all of it in a hardship situation.
- Brand X Pictures/Brand X Pictures/Getty Images