I don’t think many people would be confused about this, but just in case:

QUESTION: Is the industry standard, if a buyer defaults on a contract to buy a house, the agent gets to keep the deposit, or does the seller get to keep all or part of the deposit?

ANSWER: There is no “industry standard.” Read your sales contract to determine what happens to the defaulting buyer’s good-faith earnest money deposit.

The deposit should be held by a third party, such as in the realty broker’s trust account, an attorney’s trust account or at a title/escrow company. But it belongs to the home seller. When a buyer defaults, the seller is entitled to keep that deposit, subject to the terms in the sales contract and applicable state statutes.

Exactly. Here’s the way it works. When you make an offer on a property, you usually put up a small amount, to show you’re serious about buying – usually $1,000, but could be $500 or even $5,000, if you want to show you’re really, really serious about buying.

Once the offer is accepted, the money is deposited, usually in a bank account set up by the seller’s agent. It is put into “escrow”, meaning it stays there until the buyer and seller both agree what to do with it.

When you sign a purchase and sale contract for the property, a couple weeks later, you will put up a more substantial amount – could be 5% of the purchase price, or more or less. This money is also put into escrow.

If and when you close, any money held in escrow is applied toward the purchase price of the property. (If the total in escrow is 5%, the money might very well be used to pay the commission due on the sale, because it usually equals 5%, as well.)

If you decide not to buy the property, well, then, several things can happen.

If you decide not to buy, and the seller says that it’s okay, then you will get a check back for all the money you put into escrow.

If you decide not to buy, and the seller says that it’s NOT okay, you are in trouble. You have a signed contract, and usually the signed contract says something like, “if the buyer defaults (does not complete) the contract, the seller is due all money held in escrow.”

This is why you want to put as little money as possible into escrow – just enough to make the seller happy, but not a dollar more.

If you decide not to buy, for a good reason, like you lost your job and can’t qualify for a mortgage loan, you can usually get your money back. That’s because it’s usually in the P&S contract.

If you’re not covered in the contract, then you are going to find it difficult or impossible to get your money back.

What will probably happen is you will ask and the seller will say no. Then, your lawyers will get involved. Then, the case will go to court.

The money in escrow will stay there until the court decides who is due the money. The money in escrow cannot be distributed until both sides agree to release it.

Under no circumstances, however, is the money given to the real estate agent, on either side of the deal. (Unless there is some sort of language in the P&S contract, and I’ve never seen that.)

One thing you may want to write into your contract is, who gets the interest on the money in escrow. You’ll want to make sure the money is earning interest, actually. The seller’s agent is not required to put the money in an interest-bearing account. Ask. If it is earning interest, the money may either be split between seller and buyer, applied to the buyer’s purchase price, given to the buyer at closing, or given to the seller. It won’t be much money, but it could potentially throw things off, at closing, unless decided, ahead of time (this happened on one of my deals).

Who gets forfeited money if buyer defaults – By Bob Bruss, Inman News, by way of The Boston Globe (second item)

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Updated: 1st Quarter 2018

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