Lorraine Ryall
The earnest money deposit is included in the purchase contract to reassure the seller that the buyer is earnest and is making a good faith offer to purchase the property. In Arizona, the earnest deposit is typically one percent of the purchase price.
As soon as the contract is fully executed, the buyer will deposit the earnest with the title company to be held in escrow until the close. At closing, the earnest money is added as a credit to the buyer as these funds are already in escrow and the amount the buyer has to bring to the table is reduced by the earnest amount.
Sellers tend to look at the earnest more like a guarantee that if the buyer cancels the contract then at least they will get to keep the earnest deposit as compensation for the time the property was off the market. But that is not the case in most cancelled contracts and the buyer gets the earnest money back. The seller only keeps the earnest money if the buyer is in breach of the contract and that is rarely why a contract is cancelled. Nearly all purchase contracts are cancelled by a contract contingency not being met.
The Arizona Department of Realtors Purchase Contract favors the buyer more than the seller, and has several contingencies and timelines where a buyer can cancel and get their earnest back. This is to protect the buyer from losing their deposit if the sale is cancelled through no fault of their own, which makes total sense. The flip side to that however is that the seller really doesn’t have any protection and most of the time won’t even get the earnest money or any kind of compensation if the sale is cancelled. The good news is the majority of sales go through and none of this is even an issue, but certainly something a seller needs to be aware of.
Here are the main contingencies where a buyer can cancel the contract and receive the earnest back:
Inspection Period
The buyer has 10 days from contract acceptance to do all their inspections and due diligence. During this time, the buyer can cancel the contract for pretty much any reason and get their earnest money back.
After the 10-day inspection period, the buyer will ask the seller for any repairs they want done to the property before closing. If the seller agrees to fix all repairs requested, the inspection period is complete and the contract moves forward. If the seller responds to the repair request, the buyer has five days to accept the seller’s response or cancel the contract and get their earnest money back.
Appraisal Contingency
The buyer’s lender will order an appraisal of the property. This is usually done after the 10-day inspection period. If the property does not appraise for at least the contract price, this becomes another negotiation and the buyer or seller can cancel the contract at this time, and the buyer will get the earnest back. If the property does not appraise and the buyer and seller agree on a price and terms, then this contingency is met, and the contract moves forward.
Buyer Contingency Addendum
When the buyer needs to sell their home in order to purchase another one, they will include a Buyer Contingency Addendum in the contract. If for any reason the buyer’s property does not close on the date listed on the Buyer Contingency Addendum, the contract can be cancelled and the buyer would receive the earnest back.
CC&R’s
If your home is in an HOA (Homeowners Association), the rules that homeowners agree to abide by are called Covenants, Conditions and Restrictions (CC&R’s). These restrictions regulate various aspects of home ownership, such as leasing or renting, vehicle parking, architectural guidelines, animals, and pets, and so on. The HOA will send the CC&R’s directly to the buyer. The buyer will have five days from receipt of the CC&R’s to review them and if the buyer disapproves of anything in the CC&R’s, the buyer can cancel the contract during the five days and receive the earnest money back.
Loan Contingency
The buyer must be pre-qualified with a lender when submitting an offer. The pre-qualification confirms the buyer has been approved and the amount of the loan approval. If the buyer is unable to obtain loan approval prior to closing, the contract is cancelled, and the buyer receives the earnest back. However, if it is due to the fault of the buyer, for example they made a large purchase that reduced their credit score or debt-to-income ratio and they no longer qualify for the loan, then they are in breach of the contract and the seller would get the earnest.
The seller will only receive the earnest money if the buyer is in breach of the contract. If any contingencies are not met, the buyer may cancel, and the earnest will be refunded to the buyer.
As we are in a seller’s market, the seller has the upper hand in negotiating the purchase contract prior to acceptance and may be able to remove some of the contingencies with a counteroffer. If there are multiple offers, a buyer may remove some of the contingencies and increase the earnest deposit to make their offer stronger.
With the market being so strong and with so many multiple offers, it is important to get an experienced Realtor to represent you and help negotiate the best price and terms prior to accepting an offer. Your Realtor should monitor the contingencies and time frames to help ensure all contingencies are met and the sale closes as smoothly as possible.
If you are thinking of selling your home and would like more information on the contingencies and how to negotiate the best terms and conditions, please don’t hesitate to contact me.
Lorraine is a Multi-Million Dollar producing agent, has been a full-time Realtor for over 12 years, is an Associate Broker of KOR Properties, a Certified Negotiation Specialist, and is on the Professional Standards Board. You can reach Lorraine at (602) 571-6799.