What is earnest money? Earnest money is the amount of money a buyer puts down to accompany an offer to purchase real estate. Basic contract law requires “consideration” as an element of a valid contract. The earnest money deposit is that consideration when a buyer makes an offer. It is used to show the seller that the buyer is “earnest” in his desire to purchase his property. Without earnest money deposits, buyers could make offers on multiple properties leaving the sellers with little recourse if the buyers back out of the contract.
The amount of the earnest money deposit is negotiated between the buyer and the seller but is usually between 2 and 5% of the offered price. Who holds the earnest money is also negotiable, but in this area it is common practice for the listing office to hold the earnest money in their trust account. The escrow or trust account is a non interest bearing account where earnest money deposits are held until the property closes or the contract is terminated. At closing, the earnest money deposit becomes a credit to the buyer for any closing costs they may have, or it is subtracted from the purchase price of the property.
This process sounds easy enough but what happens when the property doesn’t close? Who gets the earnest money then? That’s where things can get sticky. Earnest money is not like a security deposit. The buyer does not automatically get their money back if the property doesn’t close. The seller doesn’t automatically get to keep the money of the property doesn’t close either.
How this situation gets resolved will depend on what it says in the contract for purchase that the buyer and seller entered into. Escrow accounts are regulated by Illinois License Law and trust account holders must follow the law when releasing earnest money funds. Earnest money can only be released when the buyer and seller agree who will get the money and both sign off on the proper form. Without both signatures, the money cannot be released. If the buyer and seller cannot agree, it becomes a legal matter and attorneys must be retained by the
parties to try to resolve the issue. If no resolution occurs, or if one of the parties cannot be located the money will be turned over to the State Treasurer and the parties will have to contact the State for resolution.
Generally speaking, if the contract has buyer contingencies which the buyer is unable to meet after a good faith effort, our contract provides for the return of the earnest money to the buyer. If the buyer backs out for any other reason, the seller may be entitled to keep the earnest money. Always read the contract for purchase before signing to determine what the contract provides for in respect to the earnest money deposit. If either party ends up filing a lawsuit for the return of the earnest money, the losing party may be responsible for the legal fees as well as losing the actual deposit funds. Knowing the rules about earnest money before you enter into a contract will hopefully eliminate disputes if the property does not close. Remember that you are entering into a legally binding contract and, as always, you should consult an attorney before you sign any contracts.