Buying or selling real estate in Florida often entails the inclusion of an “earnest” deposit, an agreed-upon amount usually placed in escrow by the buyer during the negotiating process between the parties as a sign of goodwill and an intention to complete the negotiations. Most often, once the transaction closes successfully, the earnest deposit is applied toward the purchase price and closing costs.
As part of the negotiating process, the buyer and seller should establish certain contingencies upon which the buyer can cancel the contract. Under these specified conditions, the deposit is refundable to the buyer. The common examples of contingencies in residential contracts are appraisals, home inspections, or the issuance of loans. For example, if, during a home inspection, the buyer discovers a substantial repair issue – say, a roof leak – the buyer may be able to retrieve the deposit in the event the seller does not agree to fix the leak. For commercial contracts, buyers often offer all cash with no financing contingency but a stated due diligence period in which the buyer may cancel for any reason whatsoever, including not being able to finance the transaction if they can’t obtain a loan.
Most contracts provide for a liquidated damage provision that allows the seller to keep the deposit if the buyer defaults or fails to perform its obligations to close. A last-minute withdrawal from the contract, for example, would weigh in favor of the seller.
To complicate matters further, since the earnest deposit is held in escrow – often by a third party such as a title company – the buyer and seller must come to an agreement in order to allow the escrow agent to release the monies. Escrow agents must fulfill their fiduciary duties or risk liability for the amount owed. Therefore, the escrow agent will retain the deposit until the parties hash out their differences, whether through mediation or litigation or some other means. Only then, will the money be released to the appropriate party.
The bottom line is to make sure your contract states in no uncertain terms how the earnest deposit is to be handled and those circumstances under which it is to be returned to the buyer or retained by the seller. Having everyone on the same page is the best way to ensure a smooth negotiation and closing.