From the Legal Hotline: What happens when a buyer doesn’t pay the earnest money or option fee?

What happens when a buyer doesn’t pay the earnest money and/or termination option fee in a residential contract?

If the contract has been properly executed by all parties, there is still a binding contract even when the buyer hasn’t deposited the earnest money. The earnest money is not consideration for the contract.

However, if the buyer does not deposit the earnest money with the escrow agent within a reasonable time after contract execution, the buyer would be in default, and the seller could exercise her rights under a default provision.

The termination option fee is handled differently. If the buyer does not pay the option fee within the required three days, the only consequence is that the buyer does not have the option to terminate. The buyer is not in default, and the parties must continue to perform under the terms of the contract.

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36 Responses to From the Legal Hotline: What happens when a buyer doesn’t pay the earnest money or option fee?

  1. David J Davis says:

    I’m very happy to see you clarify this. All to often I see parties, & brokers alike thinking that “earnest money” is consideration. This is not true. The consideration of the contract is the agreed purchase price. Earnest money is NOT a requirement to validate a contract. Somewhere along the way the term “earnest money contract” got tagged on what is nothing more than a purchase agreement of contract..

    As it currently stands, the contract says “UPON EXECUTION BUYER SHALL DEPOSIT.” Nothing at all suggestive or ambiguous about UPON EXECUTION. Reasonable time is a “suggestive term.” I have heard that there is talk about changing that language in the contract, but have no official notice of it changing at this time. I think that if a buyer gets notice of acceptance at 4PM on a Friday, and waited until the immediately following Monday morning to deposit the earnest money, one might be hard pressed to find a court or judge to say that they didn’t deposit UPON EXECUTION. On the other hand, if the Buyer waited until Tuesday, Wednesday, 72 hours after acceptance, or whatever other unwritten law or rule they (Buyer) (or their Agent) chose to make up, the Buyer is probably in default and the seller can/could exercise remedies.

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  2. David J Davis says:

    I’m very happy to see you clarify this. All to often I see parties, & brokers alike thinking that “earnest money” is consideration. This is not true. The consideration of the contract is the agreed purchase price. Earnest money is NOT a requirement to validate a contract. Somewhere along the way the term “earnest money contract” got tagged on what is nothing more than a purchase agreement of contract..

    As it currently stands, the contract says “UPON EXECUTION BUYER SHALL DEPOSIT.” Nothing at all suggestive or ambiguous about UPON EXECUTION. Reasonable time is a “suggestive term.” I have heard that there is talk about changing that language in the contract, but have no official notice of it changing at this time. I think that if a buyer gets notice of acceptance at 4PM on a Friday, and waited until the immediately following Monday morning to deposit the earnest money, one might be hard pressed to find a court or judge to say that they didn’t deposit UPON EXECUTION. On the other hand, if the Buyer waited until Tuesday, Wednesday, 72 hours after acceptance, or whatever other unwritten law or rule they (Buyer) (or their Agent) chose to make up, the Buyer is probably in default and the seller can/could exercise remedies.

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    • Michael Bray says:

      Sorry David, but the agreed price is NOT the consideration. The formation of a real estate contract requires “consideration” for the contract to be binding. In general, the buyer’s promise to buy and seller’s promise to sell is consideration. Although the TREC contract forms include a provision for the deposit of earnest money, if the buyer fails to deposit the earnest money the buyer is considered in default of the contract, and the other party may then exercise the remedies under paragraph 15 of the contract. However, TREC is unable to make a determination as to whether your contract is binding. You should discuss the validity of your contract with a private attorney. Once a binding agreement has been created, a license holder handling the check must deposit the earnest money in a timely fashion in accordance with the contract terms. In addition, a license holder’s failure to deposit the earnest money within a reasonable time is a violation of §1101.652(b)(30) of TRELA.

      Also, the earnest money must be deposited by the close of business of the second working day after execution of the contract by the principals, unless a different time is agreed upon in writing by the principals to the transaction. [Rule 535.146(b)(3)]

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      • Ronny Payne says:

        Mr Bray you are wrong on the second business day.Had the discussion with TREC.Judge will just laugh or just be infuriated that your wasting their time!Call them Monday.

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      • David J Davis says:

        Mr. Bray,
        I’m sorry to be a disappointment to you & your theory about consideration but you are severely mis-informed it would seem. Per basic contract law (and the OP here) consideration of the contract is in fact the agreed purchase price on the contract. It is never the earnest money. As previously stated here (and other threads on this board) a contract can exist (though not very likely in current market) without any earnest money. As I stated previously, there is no requirement of when the earnest money gets deposited other than UPON EXECUTION as stated in the 1-4 Residential Contract. (I realize the commercial contract is worded differently.)
        I’ve actually visited with Chuck Jacobus (Attorney, & Chair of the Broker Lawyer Committee which serves TREC) on several occasions about this and he informs me that the “3 business day rule” stems from times of years ago when brokers would hold or possess the earnest money. The 1-4 contract very clearly says UPON EXECUTION. As I have said here, there is no other provision for “reasonable time” or other time periods. I gave my opinion earlier about execution at end of day, week, etc. While the earnest may not in fact be deposited immediately upon execution, basing the merits of a lawsuit solely upon the fact that a buyer didn’t deposit earnest money upon execution but rather on the very next business day, might not be a smart move. A buyer (defendant as litigant) has to be actually able to do something before one (Plaintiff as litigant) can claim that their (Buyer’s) failure to do that something is a violation of a contract or a tort.

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      • So, Mr. Davis, it would seem that you are an attorney, or at least you come across as such – “Per basic contract law (and the OP here) consideration of the contract is in fact the agreed purchase price on the contract”.

        And I am quite familiar with who Chuck Jacobus is, having served along side of him, for 6 years on the Broker/Lawyer Committee, not just attending one of his classes as many have. And, BTW, they have Co-Chairs, one attorney, one broker, and there is no hierarchy.

        And, as fas as you being “sorry to be a disappointment to you & your theory about consideration but you are severely mis-informed it would seem.”, the language that I provided is straight from the TREC website, and the teaching material they gave us for the Legal Update MCE courses (are you due for a renewal?).

        So perhaps you may want to take it up with TREC and show them the error of their ways, instead of being petulant.

        Liked by 1 person

      • ddavis1038 says:

        elpasoblogger, Welcome to the conversation (I see no prior comments or posts here by you), so your comment “the language that I provided is straight from the TREC website, and the teaching material they gave us for the Legal Update MCE courses (are you due for a renewal?).” seems just a tiny bit out of context. When/where did I even contradict you here?
        Your other comment “And, BTW, they have Co-Chairs, one attorney, one broker, and there is no hierarchy.” is self contradicting. The first part is admitted to, as we all know that there are Co-Chairs on the committee, but having anyone (or in this case two) serve as a Chairperson, does in effect create a hierarchy.
        No, not an attorney, (and if you are on the committee, you should know that, as when I have been to the committee meetings, I always tell them that I am a broker, not an attorney, or perhaps you just don’t remember?) but when given advice of attorneys such as Chuck, and of course that here (OP) by the TAR legal staff, as a Texas REALTOR, what would you expect me to do? Contradict the attorneys? I’m not saying all attorneys are always right. That’s why there are generally two sides (or more) in almost all court-room engagements. At least one of those is going to be wrong…. (and lose!) But considering the age old statement that advice is worth exactly what you pay for it, and my (your’s too) dues go towards paying for the advice of these attorneys, don’t YOU think it wise to heed their direction (advice)?
        Finally, my statement about earnest money not being required, and is NOT consideration for the contract itself, as stated before came not only from Chuck Jacobus (One I thought we all might know or be familiar with, and if not, certainly held the credentials that one not familiar with, might want to become familiar with) (I could name several other attorneys who have said the same thing, and in fact one or two of them are now “at the bench” and sometimes called, or referred to as “Your Honor,” and even they have made the rulings that earnest money is NOT consideration for a contract, but rather the agreed price is the consideration) but it is also stated by the attorney who started this blog (OP.)

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    • Ronny Payne says:

      Mr Davis very few judges are going to want to spend their time deciding if someone hasn’t turned in or not turned in a $2500 check.The wording is horrible and has always been that way.Wasting the court systems time just infuriates judges when a time table solves everything.It needs to be 3 working days from the time the contract is executed.

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      • David J Davis says:

        Mr. Payne,
        I agree with you the wording needs to be addressed. I have heard rumor that it is going to be addressed. The way you get something done about it, is contact the Broker Lawyer Committee and request it. You can even attend their meetings. (I’ve done so.) However for now the wording is UPON EXECUTION in the 1-4 contract. I stated in my original reply to this post that filing a lawsuit because a Buyer didn’t turn over earnest money until the next business day after execution (especially when effective date/time of a contract starts after business hours) would probably not end well for the one basing the merits of the suit upon this fact alone.

        In almost every real estate purchase/sale scenario I’ve been involved in (a little over 5,000) the purchase was almost always the buyer’s single largest purchase in their life so far. With this being said, why wouldn’t a buyer making this kind of purchase take the time to go and personally deposit that earnest money? This 2 day, 3 day, or whatever agents seem to want to make up, is nothing but laziness on the part of the agent. It’s NOT the agent’s role to make that earnest money deposit. The last time I looked at a 1-4 contract it said “UPON EXECUTION of this Contract by all parties, BUYER SHALL DEPOSIT…” I’m not saying the Agent shouldn’t accompany the Buyer (that’s each Buyer & Agent’s choice) but it is the responsibility of the Buyer to make that deposit.

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  3. Nannette Kendall says:

    It is TOO often, not TO often. I didn’t read past that.

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    • Andrea Gray says:

      Actually it is TO not TOO. TOO means also.
      Taught high school English for several years pretty sure I’m not wrong on this.

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      • Mike Nix says:

        Too, as in “too much”. I speaked English all my life and to just ain’t right

        Liked by 1 person

      • Soapy Sudbury says:

        Andrea, I hope you didn’t teach high school English too long:

        to a higher degree than is desirable, permissible, or possible; excessively.
        “he was driving too fast”
        synonyms: excessively, overly, over, unduly, immoderately, inordinately, unreasonably, extremely, exorbitantly, very; informaltoo-too
        “invasion would be too risky”
        2.
        in addition; also.
        “is he coming too?”
        synonyms: also, as well, in addition, additionally, into the bargain, besides, furthermore, moreover, on top of that, to boot, likewise
        “he was unhappy, too, you know”

        Liked by 1 person

      • Trey Knox says:

        “Also” is the second definition of too. “To a higher degree than is desirable, permissible, or possible; excessively” is the most commonly used application of the word “too.”

        There are two pronunciations of “to,” to͞o and tə. If you are a native English speaker, an easy way to decide on the appropriate spelling is to say the phrase in your head and use the second pronunciation. If it sounds ok, use “to.” If is sounds incorrect, use “too.”

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      • Louis Burns says:

        Nanette is correct

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  4. ED R ASKELSON says:

    REASONABLE TIME is ambiguous and subjective. Like all time sensitive matters it should have a specific amount of time. MHO.

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    • David J Davis says:

      It does. The last time I looked at a 1-4 contract it said “UPON EXECUTION of this Contract by all parties, BUYER SHALL DEPOSIT…”

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  5. Dean Vande Hey says:

    Regarding the subject of paying the Option Fee in 3 days. On more than one occasion, I have seen the Buyer’s agent think they have satisfied their Buyer’s requirement to have an Option Period by simply dropping off the Option Fee check with the Earnest Money check at the Title Co. w/in the 3-day window. Right or wrong?

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    • Bob Dole says:

      The option fee has to be delivered to the agent or seller. Dropping it off at the title company does not satisfy.

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    • Sharon L says:

      A buyers agent should NOT be taking an Option Check to the title company. Period. That is simply called laziness (unless they are a new agent & don’t realize). That check is delivered to you or your seller and the buyers agent should be coordinating with the sellers agent on how best to get that done – who it goes to and when.

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  6. Bev says:

    Wrong – it is not the Title Co’s responsibility to ‘receipt’ the Option check. The Buyer’s agent is supposed to TAKE the Option check to the Listing Agent – who may receipt it or have the Seller receipt it.
    The Buyer is counting on their agent to get it receipted within the 3 day time period to PROTECT their right to Terminate during the Option period. The Buyer’s agent should make sure to get a signed & dated copy of the receipted page for his file.

    Liked by 1 person

  7. mike garcia says:

    I didn’t get on here to learn grammar

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  8. Mary Jo Schoppa says:

    I am tired of seeing and hearing “sorry” English spoken and written. I think a quick grammar lesson is good, BUT, that may have been more of a typo than incorrect grammar 🙂

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  9. Stuart Scholer says:

    Two times too equals time to shut this thread down. Too 2 to confused.

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  10. Stephen Williams says:

    while earnest money might not be a requirement to make a contract binding, that does not prevent a seller from insisting on having earnest money in his or title company’s possession before they execute. Personally, I advise my seller clients to not respond affirmatively to offers that aren’t accompanied by earnest money. My theory is this: It’s easier to undo $ without contract than contract without $. This presumes that the $ will go to a reputable escrow agent, ie, any title company. Am I wrong in this approach?

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  11. Barb Eckert says:

    I agree Stephen, I’ve been licensed since 1986 and recall maybe one time writing/receiving an offer without earnest money. I just advise buyers that earnest money is not required by law but it sure makes the seller feel buyer is sincere about his/her offer.

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  12. Jarod Marcus says:

    Don’t you people have better things to do with your time, than to moan and whine about grammar and typos? Yes, I agree that it is pathetic that some of us, who claim to be professionals, cannot speak, write, and type properly, especially when spell checkers point out our mistakes. Hopefully those agents will either improve themselves, or be weeded out of the business. However, it is the height of rudeness to be petty in pointing those things out. It almost sickens me to read these threads when they are more about correcting each other, than trying to educate your peers with your point of view.

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  13. Ronnie Foy says:

    It has always pretty much been standard practice in my neck of the non-woods to not have a seller execute the contract until both the earnest money and option money checks are present and both are represented as legal tinder (not post dated or seller’s agent instructed to hold until a certain date.)
    Our business being what it is, people, probably more today than in the past, don’t remember to bring their check books on a trip from out of town. I can remember somewhere in the distant past, I have written letters guaranteeing an earnest money deposit within a certain date. I have done so more than once. I always felt it was unfair to ask a seller to remove a property from the market without the guarantee of any escrow deposit. Feeling that way, as a broker, I want someone other than my seller to have some skin in the game. If the selling agent doesn’t feel good enough to give a letter of guarantee of escrow funds, why should I ask my seller to take all the risks.
    There in is where the problem should be solved. A simple way to handle this, is to relay to the selling agent that while the 1-4 family contract is in agreement with the seller, the seller will not execute the agreement (sign) until the escrow funds are deposited or a letter of guarantee, signed by the selling broker is presented, and as listing agent/ broker accepting such guarantee.
    This is where the value of knowing another agent is worth it’s weight in gold.
    I have been in real estate since I was a very young man, and I am now an old man. I wish I could say I’ve loved every minute of the time. Over those years, I have met mostly good and trustworthy professionals. Most of the dealings I have as a selling agent, I will have always sold more listings of agents I have had good straight forward past deals with. I am always a little leery of agents I have never dealt with, although I’ve never felt under protected in dealing with an occasional unscrupulous agent.
    In any event, regardless of all the legal interpretations listed above, just ask yourself if what you want to do is right and can you recommend putting your seller or someone else’ seller in a possibly bad situation.
    I know we all have a buyer, seller we usually represent. As a young man, the “Golden Rule” was taught as a part of my formal real estate education, and had also been a regular part of my raising from my parents.
    I have found, over many years, if you will just apply the Golden Rule to any business, you will prosper and spend a lot less time in the court room.

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  14. Louis Burns says:

    Let’s cut back to the chase: “if the buyer does not deposit the earnest money with the escrow agent within a reasonable time after contract execution, the buyer would be in default, and the seller could exercise her rights under a default provision.” The real issue here is the frustration and angst (usually perpetrated by the agent) due to the fact of EM not being received and the subsequent quandary of what to do next. The default provisions stated in the contract are lame, at best, and raise more questions than solutions. What rights? Read paragraph 15 very closely and see what remedies make sense, if any. “(b) terminate this contract and receive the earnest money as liquidated damages, thereby releasing both parties from this contract.” Great. What if there is no EM? Are the parties then released from the contract? Believe me, as many attorneys as I have posed this question to, is as many different answers I have received. This is why more concise language and problem resolution need to be incorporated into the contract, if legally possible.

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    • ddavis1038 says:

      Louis, I very much agree. If there is no actual earnest money on deposit, the very best the seller might hope for is the declared amount of earnest money as described in paragraph 5 (of the 1-4 contract). Enforcing specific performance as described in 15 (a) for the Seller may be no less than very costly and time consuming at best. All at the hands of an attorney.

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