Is Earnest Money Refundable?

When you are purchasing real estate, there are various things you need to understand. One of those things is whether or not earnest money is refundable. If you have never heard of “earnest money,” you may wonder, “What is earnest money?” Below we will discuss the meaning of earnest money, how much a typical earnest money amount is, and whether or not you can get your earnest money back.

This is a deposit that a real estate buyer makes to a seller to represent their good faith in making the purchase. In other words, it is a deposit you make on a real estate you want to buy to show the seller that you are serious about making the purchase and are not wasting anyone’s time. If you are unwilling to make this deposit, the seller will likely conclude you are not serious about making the purchase and will not accept your offer.

Once you make the deposit, the money stays in an escrow account until closing. At this point, the amount is put towards the purchase price. Usually, the earnest money deposit is paid after the sales contract or purchase agreement is signed.

In California, the typical EMD is 1% to 3% of the sales price. The EMD may be written as a percentage or an absolute dollar amount. For instance, on a $2,000,000 real estate purchase, the EMD might be written as 2% or $40,000.

So, is a higher EMD better? Whether a higher EMD is better depends on several factors, including the market's competitiveness and your preferences and risk tolerance. That said, a seller will likely find an offer with a higher EMD more favorable than a similar offer with a low EMD.

Your earnest money may or may not be refundable. Generally, if you are acting in good faith and have contingencies still in place, your earnest money is refundable. A contingency is a clause in a real estate contract or agreement specifying a condition that must be met within a certain period. A contingency is a protection that allows you to back out during a set time period. For instance, a loan contingency gives you a certain amount of time to find funds. You can back out without penalty if you cannot find financing within that time. Other types of contingencies include inspection contingency, appraisal contingency, and home sale contingency. Suppose you have 18 days from acceptance to conduct property inspections. You conduct property inspections and find that the real estate needs too much work. In such a case, you can back out and get a refund of your earnest money as long as 18 days have not passed since acceptance.

Once you remove your contingencies, you risk losing your earnest money. You will likely have forfeited your earnest money if you change your mind after removing your contingencies. However, in the state of California, a buyer must remove their contingencies by completing a contingency removal form. Otherwise, their contingencies remain in effect.

If you need legal guidance before purchasing real estate or help understanding if and how you can get your earnest money back, contact our skilled attorneys at SAC Attorneys LLP.