Questions and Answers on:
EARNEST MONEY
DEPOSITS
Questions and Answers on:
EARNEST MONEY
DEPOSITS
Q: If a contract contains a rescission (“cooling o”)
period, can I get my earnest money back if I cancel the
contract during that time?
A: Probably; however, most purchase contracts do
not have a rescission period. Only in certain kinds
of transactions will you be allowed (for a limited
time) to cancel the contract. These transactions
include developer offerings of condominiums,
timeshares, and interstate land sales; and where
a seller fails to give you certain disclosures in a
timely manner, including the Residential Property
Disclosure Statement, Mineral and Oil and Gas
Rights Mandatory Disclosure Statement, and, (for
properties built before 1978) the lead-based paint
disclosure. These rescission rights are usually
created by state or federal law. The amount of time
varies but is typically only a few days. You should
consult your own attorney about rescission rights in
such transactions.
Q: Isn’t there a federal law that allows me to rescind
my home loan and get my earnest money back?
A: No. Although there is a federal law that gives
you three days to cancel a home loan commitment,
it does not give you the right to cancel a purchase
contract and get a refund of your earnest money.
Your obligation to purchase as set forth in the sales
contract is unrelated to your right to obtain the
best possible loan or avoid a loan that has hidden
conditions. However, the standard Offer to Purchase
and Contract form has a provision allowing you to
Superior Court although some cases may go to federal
court). The parties may also resolve disputes through
voluntary or court-ordered mediation. Alternatively,
the escrow agent may choose to pay the disputed
funds to the Clerk of Court in the county where the
property is located after first providing 90 days written
notice to you and the seller. If the disputed funds are
deposited with the Clerk of Court, you would have to
initiate a special proceeding with the Clerk to recover
the funds. If no one institutes a special proceeding
within a year of the funds being deposited with the
Clerk, it will be deemed unclaimed and delivered to the
State Treasurer’s Office as escheated funds.
When a form other than the standard Offer to
Purchase and Contract is used, it may allow the seller
access to the money whether or not the closing occurs
as scheduled. In any event, while a broker is not
allowed to pursue a claim for earnest money for you,
the broker may appear as a witness in court.
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THE NORTH CAROLINA
REAL ESTATE COMMISSION
P.O. Box 17100
•
Raleigh, NC 27619-7100
Phone: 919/875-3700
•
Website: www.ncrec.gov
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REC 3.51
•
7/31/20
cancel the contract for any reason or no reason prior to
the expiration of the “due diligence period” agreed to
by the parties. If you cancel the contract during the due
diligence period, you will get a refund of your earnest
money deposit, although you would lose any fee you
paid for the right to terminate during the due diligence
period, and any fees paid to third party vendors for
items such as inspections.
Q: Under the standard Oer to Purchase and Contract,
do I get my earnest money back if the transaction does
not close?
A: It depends on why the contract isn’t
consummated. If the transaction does not close due
to your inability to fulfill your contractual obligations
(such as your failure to obtain necessary financing),
the seller would be entitled to retain the earnest
money deposit plus any due diligence fee, but would
not be entitled to any other damages. Conversely,
if the transaction does not close due to the seller’s
material breach (such as the inability to deliver
marketable and insurable title), the buyer would be
entitled to recover the earnest money deposit and due
diligence fee, together with reasonable costs actually
incurred by you during the due diligence process
(for example costs incurred for a survey and property
inspection) in addition to other remedies available at
law.
Q: What if the contract fails and the seller and I cannot
agree on who is entitled to the earnest money?
A: According to the terms of the standard Offer to
Purchase and Contract and the rules governing real
estate brokers, if there is a dispute between you and
the seller over the return or forfeiture of an earnest
money deposit, the escrow agent holding the money
must continue to hold the funds in trust until you
and the seller resolve the dispute in writing or until
a court decides the matter (less than $10,000, Small
Claims Court; more than $10,000, usually District or
MAKE ADJUSTMENTS FOR ROLL FOLD. MAKE ADJUSTMENTS FOR DOT GAIN.
A publication of the North Carolina Real Estate Commission
the seller. It is typically a small percentage of the
purchase price and can vary depending upon local
market conditions, the price of the property, the type
of property (e.g. vacant land, existing housing, or new
construction), whether cash advances to a builder or
seller are involved, and other factors.
Q: What happens to the earnest money before closing?
A: The purchase contract governs where earnest
money will go. It should also specify the amount(s) to
be paid, when the payments are to be made, whether
the money will be held in a trust (escrow) account,
who will hold it, whether it will be credited against the
purchase price at closing, and what may happen to it if
the transaction does not close.
Q: Will my earnest money earn interest between
contract and closing?
A: Probably not. Most earnest money is held by
real estate brokers in non-interest-bearing trust or
escrow accounts. In order for the money to earn
interest, the buyer and seller must agree, and they
also must determine who will earn the interest. Such
an agreement should be included in the purchase
contract and may require the assistance of an attorney
to prepare.
Q: Who can hold earnest money?
A: Any person (or entity) agreeable to you and the
seller, but usually a licensed real estate broker or
licensed attorney. As a buyer, be aware that if you allow
earnest money to be held and deposited by a seller
or by a builder or developer for use in construction,
you risk that they will not be able to return it to you in
the event the transaction does not close (due to the
seller’s death, divorce, bankruptcy, judgment liens,
receivership, fraud, tax liens, title problems, etc.).
Consequently, most buyers prefer to have real estate
agents or attorneys hold the earnest money deposit.
Since they are licensed by the state and required to
deposit the money in a trust or escrow account, this
reduces the risk that the monies will be improperly
used.
Q: Under the standard Oer to Purchase and Contract
form*, who holds the earnest money?
A: The form permits the parties to select who will
hold the money - typically, the listing firm. Whenever
a licensed real estate firm or agent holds any earnest
money, it must be deposited in a trust or escrow
account until closing. However, if any addenda are
used with the form, check to see whether they conflict
with any provisions in the form concerning who will
hold the earnest money or other pre-closing deposits.
*The Standard Form No. 2-T, Offer to Purchase
and Contract is a well-known and widely used
form jointly adopted by the North Carolina
Bar Association (a voluntary professional
association of attorneys) and the NC REALTORS
®
(a voluntary professional organization of real estate
agents).
Q: Is earnest money the same as a due diligence fee?
A: No. The “due diligence fee” is a separate, non-
refundable fee a buyer may pay for a negotiated period
of time (the “due diligence period”) during which the
buyer may perform inspections, obtain loan approval,
schedule a property survey or appraisal, review
restrictive covenants, and determine whether or not to
proceed with the purchase. The due diligence fee is
paid directly to the seller under the standard Offer to
Purchase and Contract.
Before the end of the due diligence period, the
buyer has the right to terminate the contract for any
reason or no reason at all, while the seller remains
bound by the terms of the contract. Buyers typically
want to negotiate the lowest due diligence fee for
the longest due diligence period, while sellers want
to negotiate the highest fee for the shortest period.
Regardless, just like the earnest money deposit, no due
diligence fee is required by law.
If a buyer wants the seller to make repairs, the
buyer should have the parties enter into a signed,
written agreement before the expiration of the due
diligence period to have the specific repairs completed.
While the due diligence fee is non-refundable, except
in the event a seller breaches the contract, the due
diligence fee is typically credited to the buyer at
closing.
For more information about due diligence, please
refer to the Commission’s Q & A on: Due Diligence for
Residential Buyers
Q: What if the standard contract form is not used?
A: Many developers, builders, employee relocation
services and lenders’ asset managers use their own
sales contract forms. Generic contract forms are also
commonly available and can now be found on the
Internet. Many will require you to make an earnest
money deposit or similar deposit, but they may differ
from the standard form in how it is to be handled. For
example, unlike the standard Offer to Purchase and
Contract form which contains inspection and repair
provisions, title requirements and other protections,
there may be no provision allowing you to obtain a
refund of the earnest money under any circumstances.
Therefore, you must read every contract form carefully
and consult with your attorney if you have questions.
Continued
Questions and Answers on:
E A R N E S T M O N E Y
D E P O S I T S
This brochure in the Commission’s Questions
& Answers series examines issues arising from the
payment of earnest money deposits prior to closing
a residential real estate sales transaction. Since
payments made before closing are not treated
the same in all transactions, it is important to
understand the purpose of earnest money and how
it will be handled during the transaction. This is
usually spelled out in the offer to purchase or sales
contract.
Therefore, you should always read the contract
or offer to purchase before paying any money and
CONSULT YOUR OWN ATTORNEY IF YOU DO NOT
UNDERSTAND THE PURPOSES AND DISPOSITION
OF ANY PAYMENT OR ANY OTHER TERMS IN THE
CONTRACT OR OFFER.
The questions raised in this publication
are of special concern to real estate purchasers.
Consequently, they are posed from the standpoint of
the purchaser.
Q: What is “earnest money?”
A: It is money you give to the seller (or the seller’s
agent) to show your good faith when making an offer
to purchase the seller’s property.
Q: Do I have to pay an earnest money deposit to have
a valid contract?
A: Although no law requires it, sellers typically do
require it. If you agree to pay earnest money but
do not make the required payment or your earnest
money check “bounces,” you will probably be
considered in breach of the contract.
Q: How much earnest money should I pay?
A: The amount is negotiated between you and
