Can You Get Your Earnest Money Back
Mindy Jensen has been buying and selling homes for more than 20 years. Her preferred method of investing is the flip buys a house, moves in, makes it beautiful, sells it after two years to take advantage of the Section 121 Capital Gains Exemption, and starts the process all over again. She is currently working on her ninth live in flip. She also the co host of the BiggerPockets Money Podcast.
As both an agent and an investor, Mindy LOVES real estate. She has taken part in syndications, private lending, and deals involving seller financing. She owns a single family rental, a short term rental, a mobile home park, a co working space, and her most recent purchase a caboose!
Mindy is an alumnus of the School of Hard Knocks and will happily share her experiences with anyone who asks. When you can get her to stop talking about real estate, you can find her on her bike or adventuring in the beautiful mountains of Colorado.
Mindy is a licensed real estate agent in Colorado.
Making an offer on a home can feel like it’s happening so quickly that you hardly have any time to think. Take a moment to make sure that you (and anyone else you’re purchasing with) understand all the important parts of the offer contract, especially those reasons for which you’re allowed to back out of the offer. These are called “contingencies,” and they’re put in place to protect your earnest money.
This is an abridged excerpt from Chapter 10 of by Scott Trench and Mindy Jensen. To get more first time home buyer tips, in the BiggerPockets Bookstore!
What are contingencies?
This is a fancy word for “conditions.” I’ll pay you for the house on the contingency that all goes well with the inspection. I’ll pay you $100,000 on the contingency that the property appraises for at least $100,000. If the property appraises for only $99,999, I don’t have to continue with the purchase.
Remember when your mom told you that no one wins with an ultimatum? Well, this is the only situation in which your mom is wrong. Every contingency is an ultimatum, and these ultimatums protect you (and your earnest money) in the event that anything goes wrong during the buying process. If anything goes south, the contingencies in your contract allow you to back out of the purchase without losing your earnest money.
What is earnest money?
Along with signing your offer contract, you will be submitting an earnest money check. This shows the seller you are serious about your offer, and you’re willing to put your money where your mouth is. The amount of earnest money will be dictated by the listing, but this number is the minimum amount required. If you’re up against competition, you can always make your offer stronger by increasing the amount of earnest money.
Fortunately, your earnest money payment doesn’t disappear. It’s credited toward your down payment at closing. For example, if you write a $10,000 check for earnest money, that will then roll over to cover some of your down payment and closing costs. If your down payment and closing costs happen to be less than that amount, you will get a refund after the house is yours.
Unfortunately, earnest money can be forfeited to the seller if you do not comply with the terms of the contract or if you miss a deadline. Your agent should help keep you on schedule with your dates and deadlines, but you want to make sure you’re on top of them as well. Enter everything into your calendar and set alerts for the day before to make sure you stay on top of all you need to do. Though your agent should help remind you, you are the one who will be hurt the most if you miss a deadline.
When can I get an earnest money refund?
This depends entirely on the “contingencies” section of your contract. Typically, as long as all deadlines are met, the buyer is allowed to back out of a deal for five common contingencies: loan approval, home sale, home inspection, appraisal, and title insurance.
Loan approval and home sale
If you’re currently living in a house that you must sell before buying another, that would be a home sale contingency. Also, no big surprise that your lender must be able to underwrite and approve your loan before replica hermes jumbo hook
you can buy the house. The extent to which you can do this depends on your contract and if you included an inspection contingency.
With an inspection contingency, you can make it clear to the seller that you’re not going to nitpick over everything in order to negotiate further on price. Essentially, you aren’t going to ask for repairs on the “little things” in the inspection report.
If you’re only getting an inspection to check the major items like the HVAC system, roof, structural integrity, and radon levels make sure to note this in your offer and specify what needs to pass inspection. This contingency is especially helpful if you’re buying an old, ugly home to force appreciation. The appraiser will look at comparable properties that have sold recently the same properties we told you to look at with your agent to determine a purchase price and use those comps to determine the home’s value.
Your contract will likely contain an Provisions section, which outlines the appraisal process, who pays for it, and what happens in the event that an appraisal comes in under value.
For example, if a buyer offers $410,000 on a home that appraises for $400,000, there are three options: The seller can agree to reduce the price, the buyer can bring the excess $10,000 to the table so the loan amount does not exceed the home’s value, or the buyer can back out of the purchase entirely. They should be able to back out and still keep their earnest money if this has been specified in the contract.