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My neighbor’s home recently was under contract and was supposed to close last week, but we found out it didn’t. Apparently about a week before closing they were notified by their real estate agent that the house did not appraise for the price they were under contract for. The buyers were not willing to obtain another mortgage company or get another appraisal, even if our neighbor paid for the new appraisal. We were really surprised, and so was our neighbor, to find out that the buyer did not even have to forfeit the earnest money. I thought that if the buyer did not close, they would lose their earnest money? If the buyer does not close and they still get their earnest money back, why do you even have earnest money in a contract?

Thanks Dave,

Tom, Grand Junction


The story you described happens more often than you would think and the “what happened to the earnest money?” the question is almost always certain to follow! Unfortunately the “what happened to the earnest money?” The answer is always very disappointing to the seller and it typically comes as a big surprise that not only will they not be keeping it, but it is going to be returned to the buyer. Sellers beware, in Colorado earnest money does not mean what you think it means. I think you pose a great question, “Why do we even have earnest money?” Earnest money is basically considered good faith money that the buyer typically provides to the seller when they present a contract to purchase. If the buyer and seller come to agreeable terms on a contract, then the earnest money should be held by either the real estate brokerage or a title company until the time of closing. When things go smoothly (most of the time) this earnest money is used as part of the buyer’s funds to purchase at the time of close. It’s when things don’t go smoothly…they can get complicated in a hurry! Let me make one thing clear about earnest money and Colorado real estate contracts, and as far as I am concerned it is a good rule of thumb to use, unless the buyer’s actions are egregious and ALL of the contingency dates and deadlines in the contract have passed the buyer will almost ALWAYS receive the earnest money back!

Colorado real estate contracts are written with the primary premise to protect the buyer and provide the buyer ample opportunities to figure out exactly what it is they are buying and exactly how they are going to obtain the funds for their purchase. Buyers generally place a contract on a home that they love. They imagine raising their family there, having weddings, prom nights, Thanksgiving dinners and Christmas mornings under the tree in their new home. Buyers typically place contracts on homes they love and when it does not work out they are also very disappointed. Also, keep in mind that when things don’t work out, it is not typically by fault of the buyer or really anyone’s fault. There are many moving parts to any real estate transaction, especially those that involve a loan, and there are plenty of opportunities to hit a “snag” and sometimes those “snags” are too much to overcome.  The moral of the story here is to not be surprised, as a seller, when you do not get to keep the earnest money if your transaction does not see the closing table. About the only time a seller will receive the earnest money is when ALL of the dates and deadlines have passed on the contract and the only date remaining is the closing date. If the buyers back out after all dates have passed, then that is when they will likely lose their earnest money! Here is hoping that you never have to ask the question, “who gets to keep the earnest money?” but if you do at least now you will know the answer before you ask!

Dave Kimbrough
The Kimbrough Team


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