Type ‘earnest money’ into Google and many of the top search suggestions are related to releasing earnest money prior to closing, including queries like ‘can I get earnest money back?’
It’s hardly surprising.
For commercial property developers operating in a volatile real estate market, knowing how to get back earnest money, also known as a ‘good faith deposit', is vitally important.
Should you be a commercial buyer who’s made, or is thinking of making, this good faith deposit, you may have several questions sailing through your mind that you’re unsure how to answer, including,
There’s no getting away from it: such questions are important. Despite a recent dip in prices, U.S. commercial real estate (CRE) prices have risen steadily over the past 25 years, according to the Green Street CPP Index, making for a perpetual seller’s market.
Source: Green Street
As a result, sellers and their real estate agents routinely demand earnest money deposits as proof of concrete interest in a market saturated with buyers.
Yet strong economic headwinds affecting the commercial real estate market are increasing the likelihood of a deal collapsing.
Inflation, high interest rates, and strict lending conditions may well catch you short once you’ve put down a good faith deposit, so it stands to reason that you’ll want to know how exactly you can claim your money back in the worst case scenario.
This article seeks to smooth those concerns by exploring the rules and regulations around releasing a buyer’s earnest money when a real estate deal falls through.
Whether you’re a first-time buyer or an experienced investor, read on to find out if such a refund is a viable option for you and, if so, how to get that earnest money back.
Want to get hold of earnest money and not worry about if you will get it back? Duckfund can get you funding in 48 hours and help you secure CRE property without dipping into your personal funds.
If you’ve invested in competitive markets like CRE before, you’ll know that if anything can go wrong, it often does.
While we can battle through these issues if we desperately want the property at stake, sometimes our hands are tied and we simply can’t prevent the real estate transaction from falling through.
It’s in these cases that you’d require the return of earnest money funds.
As a buyer, you’ll need to be on the lookout for a whole range of difficulties that affect whether you proceed with a deal.
Some of these might be caused by the seller: the property might be in much poorer condition than advertised following an appraisal. They might move the goalposts in terms of completion time, or their earnest money demands. You may also find that they’ve covered up important ownership details, such as a third-party lien, which may force you to void the sales contract.
Any of these situations might be enough to say ‘enough is enough’ and seek the return of your earnest money funds.
Lenders, too, often throw a curveball into the works. They might downgrade their lending amount following appraisal, or change their terms and conditions without warning. Sometimes, just a slight change in stance from the lender is enough to sink a deal.
For investors with their fingers in several pies, it’s also common for their own deals to get in the way. If you’re one of them, you’ll know how quickly things can change in a hot real estate market and force you to get your hands on extra funds at the last minute to push through a deal. A personal investment, too, like a home purchase, might create enough of an emotional pull to want you to withdraw your earnest money amount.
The time it takes to get earnest money back often comes down to a case-by-case basis, but a general rule of thumb is between 10-14 days from when the seller agrees to release the funds. Leading real estate agencies like Homelight back this up.
Add to this the potential time to contact, negotiate with the other party, and wait for their confirmation, though, and this time period can quickly turn into weeks or even months.
Releasing earnest money prior to closing is a relevant concern, especially if you’re unsure how to get the ball rolling.
First of all, it’s important to distinguish between earnest money and a down payment. A down payment is the amount of capital you must provide to make up the difference between your loan and the sale price and is typically non-refundable.
Earnest money, on the other hand, is often claimable, but this depends on the nature of the agreement you made with the seller.
Much of what you can and can’t do with your earnest money will come down to what you agreed with the seller in the sales and purchase contract just after you negotiated the purchase price.
In here, you’ll find the terms of the contract that will dictate whether you’re eligible for the refund or not, and get-out clauses that allow you to do so are typically worded as ‘contingencies’. These are stipulations which allow you to claim your good faith deposit should certain conditions not be met before a certain closing date.
If you have an appraisal contingency, for example, you’re entitled to your money back if the property value comes back higher than expected making it impossible for you to raise the right lending.
A financing contingency, meanwhile, is stacked further in your favor as it covers you in case you can’t secure lending for any other reason.
Another common clause is a home inspection contingency where you’re able to terminate the contract should property conditions not meet your standards.
Should any of these contingencies come into play, then you have an iron-clad legal claim for your money and the selling party should return it as soon as possible.
In a buyer’s market, you may want to insert even more favorable conditions to facilitate the return of your good faith deposit if necessary. A home sale contingency, for instance, acts as a waiver in the event that another of your properties doesn’t sell in time, thus depriving you of funds to complete the purchase.
You might even be able to add contingencies to an existing agreement in the form of an addendum should you change your mind at any point afterward, but this would depend on the seller’s consent.
In the event that a contingency is met, you’ll need the written permission of the seller to release the funds from the escrow title company who’s holding them.
However, there’s also the possibility that the seller agrees to release them anyway. You’ll still need their consent in writing, but this will be enough for the escrow agent to release them back to you.
There could be several grounds for this. The seller might honor an informal verbal agreement that isn’t specified in the real estate contract, or they may also believe that the sale isn’t in their best interests. The important thing is that they put pen to paper and authorize the funds release.
If a seller doesn’t play ball right away, you could consider resolving the earnest money dispute amicably via mediation. This might include offering a sweetener to get them to sign the escrow release, such as letting them keep a percentage of the funds or offering them first option on another property of yours.
Professional mediation services specialize in this type of negotiation and it may be worth paying them a fee for them to advise you how to get earnest back from the title company in the quickest way possible.
If this fails, then legal action using a real estate attorney will help you state your legal rights and may prompt the seller to comply. If they don’t, then the last point of negotiation will probably be in front of a judge, who could provide you with a court order to force the release of the funds from the escrow account, but you’ll have to prove that you’re eligible for the money and this is often a time-consuming process.
As important as earnest money is becoming, it’s still a major stumbling block for CRE investors who may not have the funds at hand, or want to risk their own money on a good faith deposit.
A new form of lending, however, aims to bridge this finance gap by not only providing earnest money funds, but also protecting them through the formation of a Limited Liability Company (LLC) that assumes the legal burden in their place.
The process works as follows: the lender creates and registers an LLC for the deal. The buyer signs a call option agreement giving them a full LLC membership stake and pays a small commission, after which the lender wires the earnest money amount via the LLC to the escrow account.
Because the LLC is only subject to a purchase and sales agreement with contingencies, the investor has the freedom to back out of the deal without putting any money down.
If the buyer does decide to proceed, they wire the deposit amount to the lender as payment for all of the LLC’s shares, then becomes the entity’s legal owner.
In one stroke, the investor secures a property they wanted without worrying about their personal liquidity. They also get to handle multiple deals at once through access to a much larger pool of resources.
As the real estate market heats up, revolutionary lending methods like this will help investors get their hands on property previously out of reach, such as sought-after office space, and make issues like releasing earnest money prior to closing a thing of the past.
Ready to see how LLC-based lending can work for you? Sign up to Duckfund and get approved for earnest money financing within 24 hours, with zero risk to your personal finances.
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