Buyer Considerations Pertaining to Earnest Money Deposits
Buyers have many considerations when purchasing a home, including how to structure an offer, how to address financing, whether to have an inspection contingency, and more. Perhaps the first consideration that springs to mind, however, in the process towards purchasing a home is how much earnest money a buyer wants to put down in order to maximize the chance of their offer’s success while balancing their own financial comfort with the commitment made towards the potential purchase.
RCW 64.04.220 defines earnest money as: “Money placed with a holder by a prospective buyer of residential real property to show a good-faith intention to perform pursuant to an executed purchase and sale agreement.” Essentially, the earnest money acts as a signal of sorts to the seller of the strength of the buyer’s intent to purchase a property. Often times, the earnest money demonstrates more than just the strength of that intent. It demonstrates a real legal commitment that can put the buyer at risk if things go wrong.
What happens if something goes wrong for the buyer? Typically a Purchase and Sale Agreement will have two possibile categories of Seller’s remedies: (1) Forfeiture of Earnest Money; and (2) Seller’s Election of Remedies. While some buyers and sellers may elect to reserve a seller’s general legal remedies in transactions, most buyers and sellers select “Forfeiture of Earnest Money” as the sole remedy under the Purchase and Sale Agreement. Buyers and sellers must beware, however, that while this remedy covers breaches under the purchase and sale agreement, it does not cover violations pertaining to Form 17 Seller Disclosures, governed by RCW 64.06 et. seq.,which can result in remedies beyond forefeiture of earnest money, such as rescission of the contract. Also, it is important to remember that most purchase and sale agreement permit a prevailing party to recover attorney’s fees and costs.
If the buyer and seller do end up having a dispute over the purchase and sale agreement, and if they disagree about the proper disbusrement of the earnest money, the escrow agent or other designated party that holds the earnest money (the “Holder”) has several duties. For example, under RCW 64.04.220(3), if one party demands release of the earnest money, the Holder must advise the other party that they have 20 days from the date of the Holder’s notice to object to the release of earnest money, or else the Holder will release the money. Under 64.04.220(5), the Holder must disburse the funds unless the Holder recieves the objection, and if the objection is received, the Holder must commence an interpleader action unless the parties provide consistent instructions to disburse the funds or agree to ask the Holder to refrain from filing. The Holder may also recover its reasonable attorneys’ fees and costs in commencing interpleader action under RCW 64.04.220(9).
While some observant buyers may take some solice in RCW 64.04.005(1) which provides that liquidated damages for earnest money “may not exceed five percent of the purchase price”, RCW 64.04.005(3) provides that “[t]his section does not prohibit or supersede the common law with respect to, liquidated damages or earnest money forfeiture provisions in excess of five percent of the purchase price.” Indeed, Washington Courts have found that when the earnest money deposit is greater than five percent of the purchase price, then the seller has all rights and remedies available at law or in equity to pursue recovery. In other words, the statute limits liquidated damages based upon earnest money deposits to 5% of the purchase price, but only when the earnest money deposit is 5% of the purchase price or less. If a buyer puts down a lot more, that can put the buyer at risk, and then the Courts may consider what damages the seller has actually suffered.
With so much on the line, how can a buyer avoid earnest money disputes? The buyer may retain its most important contingencies, such as financing contingencies and inspection contingencies. Although from a competitive standpoint, this strategy has lost some luster in the hot real estate market, it still provides significant legal protection to a buyer who cannot perform under a contract because of financing or inspection isues. A buyer can also find protection in limiting the amount of the earnest money deposit to 5% percent of the purchase price. Finally, the buyer can also avoid more forceful actions such as releasing the earnest money directly to the seller (which would require pursuing the seller directly to get the deposit back), or making “nonrefundable deposits”, a commonly utilized, but extremely vague, term that often results in litigation. While attractive from a competitive standpoint, these options can often leave a buyer in a difficult position of the transaction goes awry.
Buyers must weigh the practical and competitive considerations pertaining to their earnest money deposits with the legal consequences of perhaps taking too bold of a position without adequate protection. Should you find yourself in a difficult position pertaining to a real estate transaction, the lawyers at Beresford Booth have extensive experience addressing a multitude of real estate issues, including earnest money disputes. We would be happy to guide you towards a prompt resolution to any obstacle that you might face. If you need assistance with any real estate issues, please do not hesitate to contact us at info@beresfordlaw.com or by phone (425) 776-4100 for assistance.