Earnest money is a deposit of funds with an escrow agent (or attorney, bank or other institution) that a potential buyer gives to the seller in order to demonstrate their intention to purchase the property in question. In Texas, this is often accompanied by “option Money” which is separate and apart from your earnest money deposit—Option fees are nonrefundable deposits used to “purchase” a time period in which the seller will not enter into any other contracts for sale of the property and during which time you may terminate the contract and receive your earnest money back. This time period is usually in the neighborhood of 10-15 days depending on the type of property. Earnest money is refundable, but only in certain circumstances.
Purchase contracts for properties in Texas cover earnest money in detail, and provide for how it is to be paid, held, and distributed. Contingencies that cover the potential pitfalls in home buying, including the failure of the buyer to secure financing or the discovery of material defects or problems with the home, will be covered in the contract and its addendums. As a buyer, it is important to read and understand every contingency and the likely outcome of that contingency. Commonly, a buyer may fail to secure financing from a third party and thus cannot purchase the house after depositing earnest money. The buyer is not entitled to a return of those funds in this instance, yet many will still make a demand for the return of the funds, which can lead to an emotional response from sellers and eventually, costly litigation.
On the other hand, when earnest money has been deposited and there is a significant fault found with the property that was not apparent or obvious or disclosed by the Sellers previously, the buyers may terminate the contract and receive their earnest money. It is important to note that simple wear and tear or cosmetic damage does not fall under the category of “cause to terminate the contract.” For problems worth terminating the contract, we’re talking significant roof damage, plumbing issues, or dangerous conditions such as exposed wiring and cracked foundations.
If you have questions about earnest money deposits and returns, San Antonio Business Attorney Nathaniel Gilbert can help point you in the right direction on your property buying journey. Click here to learn more about Business Law in Texas or to get in contact with Nate for a free consultation.