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As a self-professed “contract-nerd,” I am frequently frustrated by how loosely written our promulgated forms are here in Texas.  This is in sharp contrast with California where I was previously a broker.  California’s overly litigious business climate has lead to almost 20x the number of disclosures than we require here (for example the errant golf ball disclosure required even if you don’t live any where near a golf course!) but their contracts have fewer outs and there’s less room for interpretation on some key points like loan contingencies and default remedy.

One thing I hear frequently from sellers when I go over the contract is, “When can I keep their earnest money?” I then have to use words like “technically” and “maybe” and those are not words that should be needed in a transaction that can have such huge losses like a real estate sale.  There are dozens of outs in a basic purchase contract but option period and loan contingency are usually the only ones considered.   If all of those outs have past, the seller “should” be able to keep the buyer’s earnest money (or utilize other remedies like specific performance, etc…) if they terminate but the contract makes that very hard to do because both parties have to sign off on the release of earnest money.

It only takes one party to sign off on a termination, which cancels the contract.  But then the earnest money is still being held at the title company until it’s released by mutual agreement.  The title company is a neutral third party who does not interpret the contract, they only follow instructions.   The seller can send a demand to title and the buyer has 15 days to respond or the money gets released to the seller.  Very few buyers are going to willingly sign the release or just let it go.  So both sides go back and forth and try to convince the other side that they should get the money.  Ultimately if no one agrees, the only way to get a binding decision is to go to arbitration or file a lawsuit, which both parties will threaten.   And since the contract states that the losing party will be liable to pay the other side’s attorney fees, it quickly becomes obvious that this will cost way more than the earnest money to pursue and nothing is cut and dried.  Most sellers just want to move on so they sign off on the release of the money to the buyers even though they may have suffered a loss.

Last week I was successful in getting buyers to sign off on the release of their earnest money to my sellers.  This didn’t happen by chance.  It’s so important to hire a listing agent who knows the contracts inside and out so they can set you up for success contractually.  When the buyers terminated on day 4 of our contract, they had no idea that they had no more “outs” in the contract and neither did the brand new agent “representing” them.  The buyer’s agent tried to convince us that they were not in default but my response quickly convinced all parties that they were in fact in default and that if they pursued it in court, they would most likely lose and pay both side’s attorney fees.  Monies were released the next day.

This is a crazy market we are in and buyers are trying all kinds of tricks to get their offers accepted.  Sadly, the vast majority of agents lack even basic understanding of our contracts.  It’s more important than ever to hire a BROKER with superior contract knowledge who can think 10 steps ahead to keep their seller protected.

Can you Keep Earnest Money in Texas?