Just when you're on the brink of closing the sale of your house, even after everything has been going smoothly, it's possible for the buyer to back out for what seem like spurious reasons. Perhaps the buyer points to some small matter in the inspection report, or claims that the financing terms aren't close enough to what was envisioned in their mortgage contingency. In theory, you might be entitled to keep the earnest money deposit, which might be many thousands of dollars. But in reality, will you get to keep the money?
Keeping the Earnest Money Isn't Always Possible or Advisable
Whether you, as a jilted home seller, can keep the buyer's earnest money deposit depends both on how the purchase agreement was written and the facts of how the deal fell apart. It's true that in some situations, a home buyer who backs out before the close of escrow forfeits any right to the earnest money. The purpose of earnest money is to compensate the seller for wasted time and expense if the buyer simply gets cold feet or has a change of mind, and breaches the terms of the agreement in order to back out.
Here's what you, as the home seller, should do next.
Look at Contingencies Within the Purchase and Sale Agreement
You should have a copy of the agreement that both you and the would-be buyer signed. It very likely contains "contingencies," or conditions under which the buyer could back out of the sale without it being considered a breach of contract. If there was no breach, the buyer has every right to a return of the earnest money.
One of the most common contingencies is for mortgage financing. A buyer doesn't want to be bound to go through with the deal if they can't, in the end, get a reasonable loan on terms they anticipated.
Preapproval for a mortgage loan doesn't mean a lot in this situation; even after issuing a preapproval, the lender has the right to reevaluate the borrower's existing debt, income, and general financial position, and could finally deny the loan outright; up to or on the closing day, no less. But it's also true that the lender could offer a loan on different terms than the buyer had in mind (and wrote into the contingency), in which case there would be no breach, and you would have to return the earnest money.
Another common contract contingency is for a home inspection. A home buyer wants to be allowed to hire a professional to examine the house, and then back out or renegotiate the purchase if repair needs come up in the resulting report. This contingency is, unfortunately for sellers, easy to draw on when a buyer wants to back out of a deal. Almost no house is completely free of defects, and the buyer can easily point to one as the basis for refusing to follow the deal through to closing.
Ask Your Agent Whether All Contingencies Have Been Removed
To avoid sellers having to wait until closing day to find out whether one of the buyer's contingencies will be used to cancel the deal, your contract probably also set dates by which action needs to be taken and each contingency removed.
If the buyer in this case actually got an inspection, was happy with the results, and removed that contingency, then it can no longer be used as a basis upon which to back out of the purchase. The same goes for the financing and other contingencies.
Your real estate agent will know whether all the contingencies have been removed by the buyer prior to the deal being cancelled.
Ask Your Agent About This Buyer's Precise Reason for Reneging
It's possible you won't have gotten a clear answer on why, exactly, the buyer is backing out. Even if things were apparently going swimmingly with regard to both the mortgage and inspection contingency, it's possible that last-minute issues arose, which somehow weren't conveyed to you.
Again, if one of the contingencies or another term of the contract allowed for cancellation of the deal, you are not allowed to keep the earnest money.
Even if the buyer did breach the agreement, however, consider whether you have really been damaged by that act. If it was a large deposit, and real estate prices have actually gone up a bit in the last month, perhaps punishing the buyer is not worth the arguments, or even lawsuits, that might result.
The buyer's true reasons for backing out might affect your thinking on this, too. For instance, what if the buyer was moving for the sake of a job, but the company just went bankrupt and the job disappeared. Do you really want to play hardball? You wouldn't be the first seller to show mercy and move on to the next buyer without demanding every last penny of the earnest money deposit.
If it's a true breach of the contract, however, or you feel that the buyer acted in bad faith and you can't come to an agreement on the remedy, you might want to look at the dispute resolution portions of the purchase contract. In the worst case, your state law might allow you to get a court order forcing the buyer to purchase the home.
When to Hire a Lawyer
Depending on the amount at stake, it might be easier and less costly to simply settle the matter, possibly by returning some or all of the earnest money. But a lawyer can definitely help you evaluate the situation and take action against the buyer.