Earnest money is money a buyer gives a seller to show that he is "in earnest" about purchasing the property and binds him from entering into contract negotiations with any other potential buyer. The standard Texas real estate contract provides for buyers to deposit an unnamed sum of earnest money into an escrow account which neither party has access to until the sale is completed or canceled.
In a real estate transaction, the two parties agree on an amount that the buyer will give the seller as earnest money. This amount is deposited with an escrow company that serves as a neutral third party to hold the money until the deal is completed. The money is deposited, not just held in the form of a check. If the deal works, the escrow company gives the money to the seller. If it doesn't, in most cases it is returned to the buyer.
Earnest Money Returned to Buyer
The earnest money is returned to the buyer for many possible reasons. If the property fails to meet the lending underwriter's requirements, if the buyer has legitimate objections to the title that the seller doesn't fix in 15 days, if the lender requires repairs that neither party wants to pay for or the buyer's inspection reveals problems the seller doesn't want to repair, or if the property is damaged by fire, flood or some other means after the execution of the contract but prior to closing and the seller refuses to repair the damage, the contract is terminated and the buyer receives the earnest money.
Earnest Money Given to Seller
If, however, the buyer in some way defaults on his agreements with the seller, such as failing to close on the contract, causing the contract to fail, the earnest money may be given to the seller in consideration of losses and expenses the seller made during negotiation of the sale. If a contract fails, the escrow company will issue a letter for the parties to sign regarding the disposition of the earnest money, or both parties may petition the escrow company for the earnest money.
If the real estate deal closes, the earnest money must first be put toward the down payment on the property. If it fails to close and the parties can't come to terms with which of them should receive the earnest money, especially if they refuse to respond within seven days of the escrow agent's petition for disbursal, the money may remain with the escrow agent, or be used to pay costs of the Realtor or legal representatives.
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