What Is Earnest Money?

Earnest Money is also known as Trust Money, or “Good Faith Money.” It’s a fixed dollar amount that a Buyer agrees to deposit with a legal Holder of Earnest Money (an Attorney, for example) within a certain number of days after the offer is accepted and bound.

It is not a separate or random deposit. It is intended to be used toward the expenses due from the Buyer at Closing. Some buyers do not have expenses due at closing… See “What Is Earnest Money Used For?” below to better-understand that.

In this article, I’m going to show you snippets of Tennessee and Georgia Association of Realtor contracts regarding Earnest Money. This should give you insight on what the boundaries and ramifications are concerning contract termination.

About Earnest Money

The terms of the Earnest Money are created in the initial written offer and can be countered by the Seller. This includes:

  • Where it will be deposited
  • How many days after binding agreement a Buyer has to deposit it
  • The amount
  • Where the Holder of Earnest Money (EM) is physically located
  • Acceptable forms of payment – i.e. Wire Transfer, Check, Money Order, etc.
Screenshot of a Georgia Association of Realtor Purchase contract reflecting verbiage about the Earnest Money.
Screenshot of a Georgia Association of Realtor Purchase contract reflecting verbiage about the Earnest Money.
Screenshot of a Tennessee Association of Realtor Purchase contract reflecting verbiage about the Earnest Money.

In Georgia, the Attorney or Holder of the Earnest Money has to sign a “F511 (‘Escrow Agreement’)” contractually agreeing to be the Holder of the Earnest Money. That isn’t necessary in Tennessee.

A Buyer isn’t required to deliver the Earnest Money to the Holder of Earnest Money until the Purchase Agreement between both parties is accepted and bound.

Binding (vs) Non-binding Agreement – Adobe Article

What Is Earnest Money Used For?

Earnest Money is usually applied to either the Buyer’s down payment, or their closing costs (including Title fees/expenses). It is a recognized, accounted line item on the final ALTA that is applied to the transaction.

If it is negotiated that a Seller agrees to pay for a Buyer’s Closing Costs, Title, Pre-paids, or their “total expenses due at closing,” the Earnest Money will be returned to the Buyer in written or wire form once the transaction has closed.

Who Receives Earnest Money When a Contract is Terminated?

Always… always refer back to your bound contract in the state you’re in. Each agreement is worded and organized differently, especially if that agreement is not an Association of Realtor Agreement.

Many states, including Tennessee & Georgia, have literature built in that clearly states when at least one party (usually the Buyer) has the right to receive the Earnest Money back in full when termination occurs. Earnest Money is usually returned to the Buyer “by default” when an Agreement is terminated using one of the contract contingencies.

What is a Contingency? – Bankrate Article

“By default” above is still open for interpretation. If it can be proven that a Buyer did not “act in good faith,” or didn’t perform (a popular legal term), the Earnest Money could potentially be liable for dispute. An example of this would be a Buyer terminating a contract with an Inspection Contingency, but never actually having the property inspected. Physical reports are furnished when an inspection is completed.

Performance, Negligence, Contingencies, and wild stories are obviously a deep rabbit trail that we could follow. Let’s stay focused on Earnest Money!

Here’s another excerpt of a Georgia Purchase Agreement, which I highly recommend using if real estate is being bought and sold in Georgia. When you view the literature, you’ll understand why. See below:

Entitlement to Earnest Money and Disbursement of Earnest Money are sections in the Georgia Purchase agreements that clearly outline the Earnest Money dispute process.
This contract clearly defines the Earnest money Dispute process.

Here’s a section from the Tennessee (TAR) Purchase Agreement, which again I highly recommend using if you’re in the state of Tennessee:

At first glance, it seems like the Tennessee Agreement isn’t as defined or detailed as the Georgia form above. But if you read through an entire RF401 Tennessee Purchase Agreement, you’ll notice that Earnest Money is referenced in each Contingency section separately. Inspections, for example, define what will happen with Earnest Money in Tennessee if termination occurs due to a poor Inspection outcome:

What I hope you takeaway is – read your contracts ENTIRELY before signing them, and ask your Agent questions that address your concerns. If you’re working with an Agent that is pressuring you to hurry and sign, you’re working with the wrong Agent! Fire them.

Even in Housing Market booms like we had in 2021, there’s always time to sit down and read through a contract. If your Agent communicates well, they’ll explain the timing that you have to review the contract. And they’ll also communicate well with the Listing Agent or For Sale By Owner that you’re potentially working with. You may have to stop what you’re doing and read it, or revise and correct it, but no home in America is worth entering into a faulty contract.

Terminating Without a Contingency

Depending on what phase you’re in of your contract, this could have major legal implications.

  • Death/Emergency in the family
  • Health Emergency
  • Divorce
  • Identity Theft
  • Job change or getting fired unexpectedly
  • Relocation
  • Act of Arson

They usually don’t – but there’s a multitude of things that can happen when a property is under contract. When termination is imminent beyond the control of the Buyer, but still occurs without the use of a Contingency, Sellers can be pretty understanding of the circumstances. Earnest Money disbursement is still negotiated, but the outcome favors the Buyer on average. It can be split somehow between the parties, or simply returned to the Buyer in full.

When a Buyer terminates a contract for no good reason – such as, “another house came on the market that we like more” – the Seller has the right (and certainly should) dispute the Earnest Money allocation.

My job as a Buyer Agent in that situation is to look out for your best interests and aggressively try to get that money returned to you as quickly as possible. I may not always be happy doing that! And I may very likely vocalize the discomfort and disagreement of my position with you, so don’t take offense. My reputation as a professional is on the line in that scenario, and I don’t want other Agents that I’m involved in transactions with in the future not accepting offers from future clients of mine because you decided not to perform according to our legal contract.

“Do what’s best for you” before you sign the contract and other people exert time, effort, and dollars on your behalf. Be considerate. Time is not free, my friend.

Arbitration / Interpleader

A party can terminate in writing, or without writing. Some people choose to do so by simply not performing, or showing up to Closing. It doesn’t look great when they do this, obviously.

If a party terminates without a Contingency, and the other party decides to dispute the Earnest Money, the Holder of the Earnest Money usually provides written notice of a timeframe that each side must state their claim which should include all written evidence supporting why they deserve the Earnest Money.

The Holder of the Earnest money then “interprets” the contract and both claims within their capacity, and makes a decision on how the Earnest Money will be distributed.

Often times, the Holder of the Earnest Money is not an Attorney. But even if they are, both sides have the right to escalate the dispute to a true court of law. Sometimes that isn’t the party that came out least favorably in the decision! For example, the Holder of the Earnest Money could decide that the total amount of the $1,000 Earnest Money check be distributed $750 to Seller, and $250 to the Buyer. The Seller may feel that they deserve the full $1,000 and escalate by hiring an Attorney. That works vice versa as well, obviously.

Please note: “Escalate” in this article is not the same as a Real Estate Escalation Clause. Escalate in this article is referring to taking further or higher action.

When Arbitration / Interpleader is Escalated

Real Estate Agents & Brokers, Title Companies, Lenders – everyone that is not a hired Attorney for this case, basically – should step out of the way and let the legal process unfold. I’ve only had 1 client end up in court, but we offer support (evidence) at the Attorney’s request, and usually express that we do not wish to go to court.

As a Realtor, I’ve done my job to the best of my abilities to that point, made every effort to fulfill my fiduciary commitment to you and your best interests, and worked with your legal team to help you achieve the best outcome in court.

From there, the legal process takes over, builds the case, and you handle it in court. Both parties usually go after the other for damages, costs, etc. Please consult with your Attorney about those options. I’m not an Attorney and cannot provide any sort of legal advice.

Final Thought

It’s simple… Read your contracts. If you need a special contingency due to a special situation that could impact your contract and the dollars involved, you can do so in the Special Stipulations section at the end of an Agreement! Communicate that to your Agent (preferably in writing).

If neither side is working with a Real Estate Agent, I’d call you insane if you didn’t at least have an Attorney read over the written contract between you and the other person. Someone usually comes out better than the other in a transaction. Don’t be the loser. Mentioning an Attorney will let the other party know that you’re committed and serious about this potential transaction, but it also instills accountability.

If the other party encourages you not to consult with an Attorney in a non-Realtor transaction, I’d be very concerned. Take caution.

As it relates to backing out:

A Buyer backing out on Day 3 is much different than someone terminating three hours before Closing! (I’ve had that happen) You’re probably gathering by now that contracts are open for interpretation and negotiation between two parties. Unfortunately, there’s always “a foot hanging out of the door” in a contract atmosphere. An Attorney is hired to find that gap in the doorway and make it seem much more open than it really is. So minimize your weak points and do everything in writing.

Even communicating… Set the expectation with the other side that you prefer email correspondence.

Now that I’ve terrified you – you’ll likely never end up in a legal situation over Earnest Money. But if you do, you’ll probably be much more prepared than your counterpart.

Let’s hope you are anyway!

Good luck & God bless.

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