Earnest money is the money a buyer puts up at the beginning of the contract. Usually about 3 to 5 days MEC (Mutual Execution of Contract the point when all parties sign the original offer). The earnest money is usually (at least in the Denver and Denver Foothills) in the neighborhood of $5,000 to as much as $25,000 depending on the price of the home. Sometimes even more. This amount has gone up in recent years due to it being a seller’s market as well as our low inventory. The sellers are not wanting to remove their home from the market unless a buyer has full intentions of fully fulfilling their contractual obligation.
For this case study the situation is:
Purchase Price: $300k-400k
Amount of Earnest Money: $3,000
Blog Poster Represents: Seller
Market Condition: Slight Lean Towards Seller
The offer was extremely good for the seller. It was a cash deal. The buyer waived all loan conditions such as appraisal and loan termination date. These terms are what made the offer so attractive to the seller and they accepted with no counter offer. There were no other “outs” or conditions to financing. 10 days into the contract buyer sends over a notice to terminate with the reason being buyer financing.
Buyer believes that due to a financial situation they are able to terminate the contract and receive their earnest money back. The seller begs to differ with the buyer.
Let’s discuss this further. There is a reason real estate transactions have earnest money other than giving the buyer equitable interest in the property. It is true that the contract to buy/sell real estate in Colorado and other states is really written in the buyer’s favor. As long as the dates and deadlines and the reasons to terminate are followed to the letter of the contract the earnest money is almost always returned to the buyer. The way the contract works is let’s say the buyer found something in their inspections and they want to terminate the buyer submits a notice to terminate prior to the inspection termination deadline and the earnest money is returned with no fuss.
When things get tricky is when the buyer either blows through a contract date or they have waived the right to terminate under a specific condition. Buyers and buyer agents often write these great incentives into the contract to make their offer more competitive and appealing when there are multiple offers or if they are offering less than asking price. At this point the seller weighs their options but at the same time they know if the buyer gets cold feet or misses a deadline they can at least keep the earnest money.
The odd part of Colorado real estate law is even if the buyer is negligent or absolutely 100% wrong they can still contest the earnest money and dispute it. It is one thing about CO real estate law I totally disagree with. especially since Colorado courts are hesitant to award legal fees in these kinds of situations. So the seller needs to fight for their money.