Earnest money is an important element of a residential real estate transaction. Buyers making bids on properties prove their legitimate interest by depositing at least 1% of the offered purchase price as earnest money.
If the seller accepts the bid, the earnest money eventually applies toward the down payment for the property. If the buyer then cancels the closing, then the seller can potentially keep some or even all of the earnest money to compensate them for the inconvenience and hardship caused by the buyer’s change of heart. Those preparing to bid on residential real estate may need help to protect their earnest money during that process.
Contingencies limit financial exposure
The main method for protecting earnest money from seller claims in the event of a canceled closing is the inclusion of contingencies in the initial offer paperwork or purchase agreement. Contingencies in real estate contracts are clauses outlining scenarios in which the buyer has the right to cancel the closing without endangering their earnest money.
Contingencies often relate to the condition of the property. Inspection and appraisal contingencies are common. Buyers may also need to include a financing contingency in case they cannot finalize their mortgage or a home sale contingency if the purchase of the property depends on the sale of their current residence.
Working with a real estate attorney to craft custom offer documents and negotiate a purchase agreement can help home buyers preserve their earnest money even if a closing doesn’t occur. Buyers often need assistance from someone familiar with contract law for optimal protection during a residential real estate transaction, and that’s okay.