Are Sizable Earnest Money Deposits Necessary?

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Dear Monty: We are trying to buy a house, but the seller backed out of the sale. The real estate agent is holding our deposit until the seller pays their commission. I know this is not legal, but how can I get my large deposit back?

Monty’s Answer: The seller signed two contracts in this transaction: the listing contract with the broker and the purchase contract with you. The answer to your question is likely in the purchase contract between you and the homeowner.

Every State Has Different Rules

Not knowing the property’s location makes it an unanswerable question for me. Every state has its legal theories and statutes. Wisconsin law is the basis for the comments below. Check your contract for similar language about earnest money, and you may find your answer.

A Wisconsin home purchase contract states, “The Firm’s disbursement of earnest money does not determine the legal rights of the Parties in relation to this Offer. Buyers or Sellers legal right to earnest money cannot be determined by the Firm holding the earnest money. At least 30 days prior to disbursement per (1), (4) or (5) above, where the Firm has knowledge that either party disagrees with the disbursement, the Firm shall send Buyer and Seller written notice of the intent to disburse by certified mail. If the Buyer or Seller disagrees with the Firm’s proposed disbursement, a lawsuit may be filed to obtain a court order regarding disbursement. Small Claims Court has jurisdiction over all earnest money disputes arising out of the sale of residential property with one to four dwelling units. Buyer and Seller should consider consulting attorneys regarding their legal rights under this offer in case of a dispute. Both Parties agree to hold the Firm harmless from any liability for good-faith disbursements of earnest money in accordance with this Offer or applicable Department of Safety and Professional Service regulations concerning earnest money.”

“(1) As directed by an attorney who has reviewed the transaction and does not represent Buyer or Seller; (4) Upon authorization granted within this Offer; (5) Any other disbursement required or allowed by law.”

Several Options

No. 1: Ask your broker to draft a cancellation and mutual release document that states the Seller will return the earnest money within 10 days.

No. 2: Ask the listing broker to draft a cancellation and mutual release document that states the Seller will return the earnest money within 10 days.

No. 3: There may be other choices. Contact your attorney or find a real estate attorney and get their opinion on the best course of action.

An Opinion On History

The circumstances are unclear as to what caused the Seller to back out. That said, there are various reasons one or both real estate agents may have unwittingly contributed to that event. My experience suggests that state legislators nationwide have abdicated their legislative responsibilities to the real estate industry. The asymmetry effects caused legislators to establish a real estate commission comprised of real estate brokers. As a result, many states’ pre-approved real estate forms became agent-friendly over many decades. They now shield real estate brokers and agents from litigation and protect their commission. Real estate is not alone. There are many states where other regulated industries have oversight boards. I liken the practice to the adage of the fox guarding the henhouse.