When a buyer makes an offer to purchase real property, he or she will put a certain amount of money down towards the purchase by depositing the money with their real estate agent or closing attorney.

This “down payment” is called the Earnest Money, and the person holding it on the buyer’s behalf is called the Escrow Agent. Typically these funds are held by the Escrow Agent until closing when they are paid over to the seller and credited to the buyer towards the purchase price for the home.

However, things get a bit trickier when one or both of the parties decide not to go through with closing. Who gets to keep the Earnest Money? What if the buyer canceled? What if the seller withdrew? Does it depend on whose fault it was?

Timing is everything when it comes to the return of the Earnest Money Deposit. The time before the closing can be divided into two stages by the Due Diligence Date written into the contract.*

The Due Diligence period is when the buyer is supposed to order a home inspection and thoroughly go over the property to discover any physical problems.

The Due Diligence Date is the last day for the buyer to cancel the contract for any reason at all and still get their Earnest Money deposit back – no questions asked.

After this date, the buyer will have to prove that the seller has seriously breached the contract in order to get their Earnest Money deposit returned (hint: things that would have shown up on a timely home inspection are not automatically a breach by the seller unless the seller knew about them and lied about them).

Typically, the parties will sign a termination agreement when the contract is, which states how the Earnest Money will be handled, and the Escrow Agent will pay the Earnest Money accordingly.

However, if the parties cannot agree on how it will be disbursed, the North Carolina General Statutes require that the Escrow Agent deposit the funds with the Clerk of Superior Court, and the Clerk will hold a special proceeding to determine who is entitled to the funds under the procedure set out in N.C. General Statute §93A-12.

Depending on the amount of money at stake in a case like this (often $1,000 or less) it may benefit the parties to come to an agreement before it gets to this stage in light of the court costs and potential attorney fees required.

Two important things to keep in mind when it comes to the Earnest Money deposit:

  1. For the buyer, always be aware of your Due Diligence date and try your best to complete all inspections and negotiations for repairs BEFORE that date passes. If you need more time, ask for an extension BEFORE the date passes.
  2. For the seller, understand that the buyer can cancel the contract before the Due Diligence date for any reason and still may cancel before closing.

DO NOT incur significant costs in reliance on the closing happening, or at the very least until after the Due Diligence date has passed – negotiate for the buyer to do the repairs, if needed, after closing.

*In North Carolina, most attorneys, real estate brokers and agents use the Standard Form 2-T “Offer to Purchase and Contract” which was jointly approved by the North Carolina Bar Association and North Carolina Association of REALTORS, Inc., so I have limited this post to discussing the treatment of Earnest Money under Standard Form 2-T, but there are many different contract forms out there so always be sure to read yours carefully and understand what your contract says.

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