What happens to deposit money if an agreement to purchase real estate, also known as an agreement of sale, falls through? Sometimes this “deposit” is called a “good faith deposit” or “earnest money deposit.” An earnest money deposit provides money for the seller to keep if the buyer walks away without good cause. Once a buyer makes an offer, the deposit is placed in an escrow account. The money is returned to the buyer if the buyer has a sufficient reason for terminating the agreement of sale before closing.
Mortgage Contingency Clause
One of the most common reasons for a buyer to back out is the inability to obtain a mortgage. Many standard form agreements of sale in Pennsylvania contain what’s called a “Mortgage Contingency Clause.” If a buyer cannot secure financing after a good faith and reasonable effort to do so, the buyer can terminate the agreement without having to forfeit the deposit money to the seller. As long as the buyer abides by the requirements of the mortgage contingency clause, if financing can’t be obtained, a return of the deposit money should be expected.
Inspections and “As Is” Properties
A buyer may also be able to terminate the agreement without forfeiting a deposit if an inspection of the property reveals serious defects through inspections such as a wood eating insect inspection, radon inspection, structural inspection, and more. Sometimes a property is for sale “as is.” Even if the sale is “as is,” a buyer can still make an inspection part of the agreement of sale. What “as is” typically means is that the seller wants to sell the home in its current condition without any repairs and no adjustments in price or closing costs, even if inspections reveal major issues.
It is always recommended to get a home inspection to alert the buyer to potentially major issues, such as unseen structural damage, wood eating insect damage, mold, etc. If a seller refuses to allow an inspection as part of the sales agreement, that should generally be a red flag. Buyers should always hesitate to enter into an agreement that waives inspections in order to “get things done faster” or “make this a smoother process;” however, it is ultimately up to the buyer if they want to waive inspections or not. To get a return of the deposit money, the agreement of sale will typically have a deadline for when the buyer must notify the seller in writing that an inspection was unsatisfactory. If this is not followed, it is possible that the earnest money deposit may be forfeited, however that is not always the case.
Seller Disclosure Statement
In addition to inspections, buyers should always review the seller disclosure statement carefully. Seller disclosure statements are required by law in Pennsylvania under the Real Estate Seller Disclosure Law, 68 P.S. §§ 7301-7315. The purpose of a seller disclosure statement is to make a potential buyer aware of any material defects in the property not readily observable. Sellers must disclose known material defects in the following areas:
- Seller’s expertise in contracting, engineering, architecture or other areas related to the construction and conditions of the property and its improvements.
- When the property was last occupied by the seller.
- Basements and crawl spaces.
- Termites/wood destroying insects, dry rot and pests.
- Structural problems.
- Additions, remodeling and structural changes to the property.
- Water and sewage systems or service.
- Plumbing system.
- Heating and air conditioning.
- Electrical system.
- Other equipment and appliances included in the sale.
- Soils, drainage, boundaries and sinkholes.
- Presence of hazardous substances.
- Condominiums and other homeowners associations.
- Legal issues affecting title or that would interfere with use and enjoyment of the property.
- Condition, if known, and location of all storm water facilities, including a statement disclosing whether ongoing maintenance of the storm water facilities is the responsibility of the property owner or the responsibility of another person or entity.
68 P.S. §§ 7304(b)(1)-(17). A material defect is a problem with the property that would have a significant adverse impact on the value of the property, or a problem that involves an unreasonable risk to people on the property. If a seller is not truthful regarding these disclosures, and a material defect is discovered that seller had knowledge of that should have been disclosed, this would require a full return of the deposit money and possibly more.
What Happens if Seller Refuses to Return Deposit?
But what happens if the seller simply refuses to return the deposit even if the buyer had good cause to back out? As long as there is a dispute between the seller and buyer, the party holding the deposit will not release the deposit until the dispute is resolved either in court or arbitration. Many standard agreement of sale forms can contain an arbitration or mediation clause, requiring first that the parties attempt to settle their differences out of court and resolve the matter before any formal litigation ensues.
If seeking relief in court becomes the only option, the cause of action typically centers on either the seller failing to disclose critical information about the property or the buyer terminating the agreement without just cause. Until a final judgment is entered by a court, the party holding the deposit money will not release the funds.
Contact a Pennsylvania Real Estate Lawyer Today
If you are buying or selling real estate, whether it is residential or commercial, the legal team at Reager & Adler, P.C. can help. We have extensive experience in real estate law, along with a deep understanding of how to protect your interests. From making an offer through closing on the property, we can help you navigate this process in an efficient but thorough manner. Contact us today for a confidential consultation and to learn more.
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