Understanding Earnest Money Disputes in Minnesota Real Estate Transactions

Buying a home is one of life’s biggest events. We invest our hopes and dreams for the future in finding just the right place, but for the inexperienced, the purchase process can be fraught with pitfalls. Even after following all of the strict rules for deposits, inspections, and negotiations, the unexpected can cause a sale to fall through.

Working with an experienced Minnesota attorney who knows the regulations and the nuances in the market can provide peace of mind. Having an attorney’s advice is often enough to work through disputes that may arise. Good legal counsel can be the difference between a successful purchase and sale and a disappointing deal collapse.

Why Earnest Money is Key to a Secure Real Estate Deal

When you make an offer on a house it’s not considered actionable until funds are put into an escrow account while other steps are successfully completed. This is called “earnest money,” and it is a mutually-agreed upon sum that is usually 1 to 3 percent of the purchase price. In exchange for the earnest money the seller agrees to take the home off the market. The process usually looks like this:

1. Get prequalified for a mortgage.
2. Find a house within your price range that you want to buy.
3. Write a purchase and sale agreement that includes any contingencies (such as a requirement that it pass inspection and a promise to purchase if your present home is successfully sold).
4. When the purchase offer is accepted, deposit earnest money in a third party’s escrow account (such as an attorney’s or title company’s account).
5. Make your mortgage bank aware of your plans so they can arrange an appraisal and set a closing date (six weeks to three months in advance).
6. Hire an impartial inspector to view the home and report on its condition. Compare the information to the seller’s mandated disclosure documents.
7. Renegotiate the purchase price if serious faults are found with the property or if the bank’s appraisal is low.
8. Have the deed and title to the property researched and examined for liens or imperfections.
9. Gather your downpayment, which is due at closing.
10. At closing, sign the mortgage paperwork and title documents. Your earnest money is put toward the downpayment.

Purchases can fall through, however, and getting your earnest money back can become contentious. The seller may claim the earnest money is theirs in exchange for taking the home off the market while the buyer performed their due diligence.  Disputes over earnest money usually happen when:

1. The house does not pass inspection.
2. The buyer’s or seller’s mortgage plans do not pan out.
3. The home appraises for less than the sale price.
4. The title of the property is faulty and cannot be easily remedied.
5. The buyer has a change of heart.

Most of these issues are resolved by looking at the purchase contract, which contains contingencies. These are the conditions under which the buyer promises to purchase the property. Most purchase agreements include common conditions, such as the home passing inspection and the home’s appraisal value meeting the selling price. However, inexperienced buyers and buyers in some very competitive real estate markets skip contingencies completely, which can be a big mistake.

If the purchase falls through as a result of a contingency stated in the purchase contract, the escrow agent should refund the earnest money. If the buyer simply changes their mind about the property, it’s up to the seller’s generosity to give the money back.

When a dispute over earnest money cannot be settled between the seller and buyer, the escrow agent will suggest mediation. If that isn’t effective, the funds are moved to a special civil court account and the dispute may be litigated.

Proactive Steps Prevent Purchase Problems

Working with an experienced real estate attorney from Waypoint Law helps ensure a smooth, secure purchase experience. As experts in Minnesota real estate transactions, Waypoint Law will help you avoid the pitfalls common to the process as well as reducing stress and protecting your most valuable investment–your home.