Buying a house can be a very exciting time in a person's life. Chances are, if you're reading this, you have entered into a Contract to Buy or Sell property and have experienced closing on that property or have seen a sale fall through. The ladder option can happen for a multitude of reasons: failed inspection, previously undisclosed condition, financing, etc. However, before most of these reasons come to light, a potential buyer will show up to the negotiating table with earnest money. Earnest money is simply a showing by the potential buyer that they have an intent to follow through with the sale and act in good faith. Earnest money amounts vary and typically are in proportion to the value of the property. If the sale goes through, the money is applied to the purchase price. If the sale does not go through the money is either returned to the potential buyer or tendered to the seller.
Typically, after a certain point, if either party breaches the Contract to Buy and Sell the other party is entitled to the earnest money. The Colorado Real Estate Commission has approved Contract to Buy and Sell forms, which specifically outline the earnest money requirements. The earnest money section will state the amount to be paid, the deadline to pay the amount, who will hold the money in trust until the closing, provide closing transfer instructions and what happens to the earnest money if the sale does not go through. For example, under the Colorado Real Estate Commission form:
§4.3.2. If Buyer has a Right to Terminate and timely terminates, Buyer is entitled to the return of Earnest Money as provided in this Contract. If this Contract is terminated as set forth in § 25 and, except as provided in § 24 (Earnest Money Dispute), if the Earnest Money has not already been returned following receipt of a Notice to Terminate, Seller agrees to execute and return to Buyer or Broker working with Buyer, written mutual instructions (e.g., Earnest Money Release form), within three days of Seller's receipt of such form.
It seems pretty straight forward, however, when parties disagree as to whether termination was timely, the right to the escrowed money can be disputed. What happens when the deal is rightfully terminated, you send a Notice to Terminate and a Seller (or potential buyer) will not execute the Earnest Money Release form? It will not be released to either party. That's because both potential buyer and seller must execute the form for the escrow company to release the money. This puts the potential buyer in a very vulnerable spot. If the sale does not go through and you, the potential buyer, are out $10,000 in earnest money awaiting the Seller's signature you might waste valuable time in your search for a home or rental property.
What do you do when you have an earnest money dispute? Communication is key. But what if the other party does not respond to your requests? The funds will remain in escrow until resolution as the holder has an obligation to hold the funds until authorization from both parties is received. Often, outlining the terms of the agreement and the facts will clear up the dispute. If not, most Contracts to Buy and Sell include a mediation provision. This means that prior to initiating litigation, the parties must attempt to mediate the dispute. Neither party is bound to a mediation decision. The parties work together to determine a reasonable outcome. While mediation requires payment to a mediator to facilitate resolution, it is not nearly as expensive and time consuming as litigation or arbitration.
If you find yourself in an earnest money dispute, you should have a Real Estate attorney review your contract and termination documents and all communications between the parties. This includes those through your real estate professional (i.e. broker, realtor), if there is one. If it is determined that the contract was rightfully terminated, having a strong start is important in obtaining a swift resolution. If you have any questions about the contents of this blog or if you need legal advice as to an issue, please contact the Beavers O'Connell Group at (720)538-0363, [email protected] or fill out a form under our Contact page.