Q: My wife and I gave earnest money for a piece of land to build our dream home. Before we paid the full amount, the seller contacted us to say the drainage plan failed on the land and had to be re-engineered. NOW the land has a drainage pond in it, which my wife and I don’t want as it is too much upkeep etc. I asked the seller to refund our earnest money and he said NO. What can I do to get it back? – Paul
A: To protect your earnest money (the buyer’s initial deposit) it should be held in an escrow account, not in the seller’s personal bank account. In some states the escrow account must be held by an independent third party such as a title company or escrow company. In other states, the escrow account may be controlled by the seller’s attorney or real estate agent’s attorney.
The idea of an escrow account is that the money is controlled by an independent escrow agent who has a legal duty to use the funds for a specific purpose – in this case, to purchase the property – and to follow the conditions agreed to by both parties. The conditions are defined by the Purchase & Sales (P&S) Agreement and state law.
The P&S spells out the conditions under which the earnest money must be refunded to the buyer. Typically, these include:
- They buyer fails to get financing
- The property fails one of the required inspections
- The property fails the perc test
- The property fails other conditions spelled out in the P&S
- The seller is in material (serious) breach of the P&S agreement
In general, each contingency included in the P&S Agreement has a deadline, under which the buyer must notify the seller and request a refund. As a buyer of real estate, whether a house or land, I always like to include a broad contingency such as “Results of all inspections shall be satisfactory to the Buyer at Buyer’s sole discretion.”
This avoids the seller nitpicking as to whether the property really failed the inspection. That should be up to you – the buyer – to determine.
I also strongly recommend having a lawyer draft, or at least review, any offer before you present it to the seller – especially if you are working directly with a seller who is not represented by a real estate agent.
It’s important to include a long enough inspection period to conduct the necessary tests and research. If tests or inspections are delayed, buyers can request an extension of the deadlines as needed. However, if the buyers simply change their mind, and decide they do not want to go through with the purchase, they risk forfeiting the earnest money unless the seller chooses to be a nice guy and returns the deposit.
It is possible that the drainage pond changes the description of this property sufficiently that you can argue that it invalidates your offer. The lot now is not the same lot that you made an offer on. This is a legal question and a gray area, so you should consult the lawyer who is representing you about the best way to proceed.
If you are not working with a real estate lawyer, find one quickly as time is of the essence in requesting a refund. The longer you wait, the stronger is the seller’s position that you have cost him money by taking the property off the market for an extended period. – Steve Bliss, BuildingAdvisor.com
Read more about Earnest Money and Contingencies.
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