Good question; there is no simple yes or no answer to this one. The earnest money submitted with the offer is meant to cement the deal and enable the buyer and seller to enter into a contract for the sale of the house. Most offers and contracts do state that the buyer will forfeit the earnest money if they do not perform as stipulated. In other words, if the buyer backs out, they lose their deposit. However, and it’s a big however, there are a lot of things to consider here.

Nearly all buyers suffer from “buyer’s remorse" at some point after the offer is accepted. The majority of the time this occurs in the first ten days. The important thing to remember is that, in most instances, this is a fleeting stage and in a short period of time they will get over it. The ones that don’t are the problem. In my twenty plus years as a Realtor®, I have experienced this about 2% of the time. In these cases I have found it advisable for the seller to agree to cancel the transaction and move on.

Buyers have many opportunities to get out of a contract in a “legit" manner. Most offers have an inspection contingency clause and if you don’t agree to correct the items discovered (not those you have disclosed prior or those that are obvious with a prudent visual inspection), then they have the right to back out. There are also legally mandated disclosures in most States and if the buyer has not been given them before entering into the contract and acknowledged them, the buyer can cancel when they are presented with the disclosures due to non-disclosure of items affecting the property. Doesn’t matter what the disclosures are, they weren’t given prior to the contract! If the buyer can’t get the loan within the terms stipulated in their offer (maybe interest rates went up) then no deal, as the offer likely had a financing contingency. Any of the contingency clauses not removed in a timely manner can also give them the reason they need. What if the appraisal came in low? What if you don’t live up to your side of the contract or act within the timeframes specified?

So, what to do? If you have used a Realtor® or followed along in the manual “FSBO: You CAN Do It" (fsboyoucandoit.com), if you are a For Sale By Owner, then you would have previously removed almost all the circumstances listed above. What you are left with is a buyer who wants to renege on the deal for no good reason. Maybe they saw another house they liked better. Maybe they were just too scared to complete the sale as it put them way out of their comfort range. Whatever the reason, they want out and they want their deposit back.

You feel that you have a legitimate claim on that money as you took your house off the market and have suffered a financial hardship by not having the sale close as planned. Should you try to hold the buyers to the contract or have them forfeit their deposit? My advice on this would be NO! Have the buyer sign a cancellation agreement, instruct the escrow holder to return their money and cancel the contract immediately.

If you don’t agree to cancel, you will likely find yourself in an unwelcome situation. But, you upheld your end of the contract and they didn’t, so they were in the wrong. Yes, that’s true, but if you still want to sell your house in any kind of timely manner and not spend a fortune on legal fees, then you have to let go. If you don’t give the buyer their money back, they will probably not agree to cancel the contract. Even though you are in the right, the buyer could file a “lis pendens" (lawsuit pending) on your property, or file a small claims action to recover their money. If this happens, you will not be able to obtain title insurance and, in effect, you will not be able to close a deal with another buyer until the matter is resolved in the courts. I had a seller once who was so incensed by a buyer who just wanted out (he was extremely rude and insulting when she didn’t agree) that she refused to sign cancellation instructions and release the buyer’s deposit. Needless to say, the buyer sued for the return of his earnest money ($10,000). My seller decided she was not going to give in on principle as she was in the right. Her house was now effectively off the market as the prior “sale" had not been cancelled. It took almost nine months and about $20,000 in legal fees to resolve. She won in court and got to keep the deposit but by this time there had been a spike in interest rates and the market had slowed down. Her listing had expired during this time and I was not willing to re-list the property as, had she listened to me in the first place and just let go and got on with it, the house would most likely have “sold" again within a couple of weeks. Also, if you do try to make the buyer go through with the sale, I would bet that the deal would collapse at some later point in the escrow period due to some other action, or inaction, on the buyer’s part and you would have lost all that time off the market.

This article is not intended to be legal advice. For legal advice always consult the appropriate licensed professional.