What happens to the good faith deposit when the homebuyer backs out? If the buyer doesn’t ask for it back, the seller needs to take control of the situation.

Q: We accepted an offer on our house a year ago. Unfortunately, the buyer walked away at the eleventh hour – the night before the moving truck was scheduled to arrive. We have yet to resolve the issue of the good faith deposit, which is being held in escrow by our Realtor.

The would-be buyer has not responded to our attempts to communicate with her. Do we have any options, other than filing a lawsuit? The deposit was for $15,000 – any legal action will most likely cost more than that. We would like to settle the matter, as nearly a year has passed.

What is a Good Faith Deposit?

A: It appears you’ve found the black hole of escrow deposits. When a buyer signs a contract to buy a home, the buyer usually deposits a sum of money as a show of good faith to hold under the contract. A seller wants a large amount to be put down and a buyer wants a small amount. Negotiation ensues and a check is written.

When the buyer puts down that money, in many states, the earnest money or good faith deposit is held by the listing broker. The listing broker, in turn, holds that money and can’t release that money unless the broker received a joint direction from the seller and buyer authorizing the release of the funds. Without that release authorization, the listing broker will hold those funds in escrow indefinitely or will petition a court and deposit the funds with the court pending resolution of the matter between the parties.

We’re simplifying the process, of course, but want to give you a general idea of what’s going on with the money. It’s unusual for the person or entity holding the money to simply return the money to the buyer without authorization by the seller. So you’re stuck until one of the parties takes legal action.

What Happens When the Homebuyer Backs Out of the Sale?

In your situation, the $15,000 amount is substantial but apparently not so much so that the buyer has made an attempt to obtain its return. So you have yourself a standoff. The party that files the lawsuit first is the party that will expend the most to get the money. Frequently, before there is legal action, you’ll see one of the parties suggest a splitting of the amount or some other distribution of the funds.

However, if you have moved on and sold the home, hopefully for at least as much as you were going to get from this buyer, then perhaps what happens to the cash doesn’t matter. If you do nothing, the buyer will eventually take action to get his money back.

If you have expenses that you incurred from the deal falling apart at the last minute, your attorney (or you) might suggest getting repaid those funds and allowing the buyer to get the rest of his money. This way you get made whole and the buyer, because he or she is also getting a chunk of cash back, should be more motivated to settle and close things out.

Right now, you have three choices: You can let things sit until the buyer makes the first move; you can propose a settlement; or, you can sue the buyer. We suggest you huddle with your agent to try to figure out the best approach and then move forward.

Good luck.

Read More on Good Faith Deposits

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Put Down Earnest Money When Buying Your Dream Home

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