Earnest Money Deposit (EMD) is the deposit paid by a prospective Buyer as evidence of their “good-will” to complete the real estate transaction; the Buyer is promising to be diligent in their efforts to fulfill the terms of the Residential Purchase Agreement (“RPA”). Additionally, if the Buyer and Seller agree, the earnest money deposit may also serve as a source of payment of “liquidated damages” should the Buyer default, that is, fail to perform in accordance with the terms of the “RPA”.
Although EMD is not required for the creation of a valid and binding “RPA” it is rare that a “RPA” does not include an “EMD”. The reason for this is that an “EMD” demonstrates to the Seller that the Buyer is serious about his/her offer. Although the amount of the earnest money deposit varies, it is usually enough to motivate the Buyer to take whatever steps that are necessary to perform as outlined in the “RPA” in the time-frame specified.
The general rule with respect to “EMD” is that the Buyer is entitled to a return of the “EMD” if the transaction does not close through no fault of the Buyer. Conversely, the Seller is entitled to the “EMD” if the Buyer breaches the “RPA”. However, when a real estate transaction fails, both the Buyer and Seller may claim a right to the “EMD”.
- 1. The “EMD” may be deposited with an escrow/title company handling the transaction. Esrow/Title copanies are a neutral third party that follows the Buyer and Seller joint written instructions.
- 2. The Residential Purchase Agreement contains provision that buyer and seller should be familiar with, since it will dictate what happens in the event the Buyer or Seller defaults.
- 3. If the transaction is cancelled, the right to the “EMD” will depend on whether there was a default under the terms of the contract, and if so, who is the party in default.
- 4. The real estate brokers and their agents have no authority over the escrow/title company. Thus, they have no authority to direct the payment of the “EMD” to either the Buyer or Seller.
- 5. Neither the escrow/title company nor the borrowers or agents lack the authority to decide who defaulted under the terms of the purchase agreement. Only a court of law can make that decision.
- 6. If a dispute arises regarding who is entitled to the “EMD”, the escrow/title company will usually hold the “EMD” until the Buyer and Seller reach a mutual agreement or until they are presented with a court order directing payment.
- 7. If the court concludes one party is entitled to the “EMD”, it will enter a judgment in their favor. The prevailing party can present that judgment to the escrow/title company, which will honor it.
- 8. Real estate brokers, their agents, nor the escrow agents can offer legal advice. If any party has questions regarding their legal rights, they should seek the advice of an attorney.