WHAT IS EARNEST MONEY
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, but this amount is negotiable. 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.
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. But that is not the case in most cancelled contracts as the buyer typically gets the earnest money back. The seller only keeps the earnest money if the buyer is in breach of the contract and that rarely happens. Nearly all purchase contracts are cancelled by a contract contingency not being met, which allows the buyer to get the earnest money refunded.
WHAT ARE CONTINGENCIES
The Arizona purchase contact favors the buyer more than the seller and has several contingencies and timelines where a buyer can cancel and get their earnest money back. This is to protect the buyer from losing their deposit if the sale is cancelled through no fault of their own, which makes sense. The flip side to that however is that the seller really doesn’t have any protection and most of the time won’t receive the earnest money or any kind of compensation if the sale is cancelled. The good news is most 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
Unless stated otherwise, 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 may 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 with anything other than fixing all requested items, the buyer has five days to accept the seller’s response or cancel the contract and get their earnest money back.
APPRAISAL CONTINGENCY (ONLY FOR FINANCED TRANSACTIONS)
The buyer’s lender will order an appraisal of the property. This is usually done after the 10-day inspection period. If the property appraises for at least the contract price this contingency has been met and the contract moves forward. If the property does not appraise for at least the contract price, the buyer has five days to move forward and agree to bring in the extra funds at closing, negotiate with the seller and come to an agreement on how to handle the difference, or cancel the contract and the buyer will receive the earnest money 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.
LOAN CONTINGENCY
The buyer must be pre-qualified with a lender when submitting an offer. The pre-qualification confirms the buyer has been pre-approved for the loan amount. If the buyer is unable to obtain loan approval for the loan 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.
BUYER CONTINGENCY ADDENDUM
When the buyer needs to sell their home 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 will receive the earnest back.
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 and would like more information on the contingencies and how to negotiate the best terms and conditions, please don’t hesitate to contact me.
For more information on this and other real estate topics, please visit my website Homes2SellAZ.com. Please don’t hesitate to contact me if you have any questions or would like help buying or selling a home.