Handling an Earnest Money Dispute

Earnest money is a deposit made by the potential buyer of real estate to indicate that they are serious (earnest) about moving forward with the purchase. It does not bind the buyer to make the final purchase, but the earnest money may be forfeited if the buyer backs out without a proper reason.

The earnest money deposit is typically held by an escrow company. In the event of a dispute between the buyer and seller, the escrow company will decide what is done with the money. However, each case is unique and who gets the money will depend on the facts and the specific language in the purchase contract. The escrow company will initially decide which party may be in breach of the agreement and who is entitled to receive the earnest money.

If the buyer discovers damage to the property during an inspection, the buyer typically has the right to back out of the deal and get the earnest money back. The inspection period is usually only for a limited time. This would not apply if you agree to purchase property in “as is” condition.

If you are unable to obtain financing after making a good faith attempt, you will likely be relieved of the obligations under the purchase contract and will get your earnest money returned to you. This requires that you made a good faith effort to obtain financing and were unable to so.

Buyers who get cold feet, find other opportunities that they would rather pursue, or change their mind will likely end up forfeiting their earnest money under Arizona’s standard residential purchase contract. However, the seller cannot always keep the earnest money deposit as liquidated damages, and may be required to show that they were ready, willing, and able to perform their end of the contract and that the deposit was in fact earnest money, rather than for some other purpose, such as progress payments used to finance construction.

The issue of progress payments was discussed in the case of Thomas v. Montelucia Villas, LLC, 232 Ariz. 92, 302 P.3d 617(2013). The buyers made three installment payments totaling $695,000 which were deemed earnest money by the purchase contract. The buyers later refused to close, claiming that the sellers had failed to perform under the contract.

The Arizona Supreme Court determined that the seller was required to show that they were ready, willing, and able to close before claiming that the buyer had committed an anticipatory breach. The court also noted that earnest money is typically not used to finance construction. In this case, the earnest money was more accurately described as progress payments, which the seller could not keep as liquidated damages.

Chernoff Law handles real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your real estate matters.

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