The Importance of Earnest Money, Texas Real Estate Contracts

When one decides to put in an offer on a home, it is customary to offer “earnest money”. There is no set amount of earnest money required to form an executed contract, if fact, earnest money is not required to purchase a property. One should seek legal advice whenever questions arise regarding a purchase contract; all parties have the right to have a contract reviewed by an attorney, even if a REALTOR® is representing the individual selling or buying the home.

What is “earnest money in a real estate contract?” It is a deposit of “good faith”- an honorable commitment on behalf of a purchasing party to show their intentions of purchasing a property. Earnest money is negotiable, but will become part of the contract conditions once a contract is executed by all parties.

If services of a title company are being used for escrow, it is important to have earnest money turned in with the contract in order to avoid a breach of contract. The buyer will have the amount of earnest money credited to them at closing, which will reduce the amount of funds the buyer needs to have in order to close on the property.

Breach of contract and earnest money:

Buyer: 1.) If the buyer “fails to deposit the earnest money as required … buyer will be in default” (TAR 1601, One to Four Family Residential Contract, paragraph 5). 2.) If a buyer fails to comply with the contract, the seller may “enforce specific performance … or terminate the contract and receive the earnest money as liquidated damages” (TAR 1601, One to Four Family Residential Contract).

Seller: 1.) “If seller fails within the time allowed to make non-casualty repairs, or deliver commitment, survey;” the buyer will have the option to extend the time for performance and extend the closing date, or terminate the contract and receive their earnest money back. (TAR 1601, One to Four Family Residential Contract, paragraph 15).

Buyer and seller: Either party, as stated in the Texas Real Estate Commission’s promulgated contract is subject to “three times the amount of earnest money; the amount of earnest money; reasonable attorney’s fees; and the cost of suit” if either party “fails or refuses to sign a release acceptable to the escrow agent within 7 days of receipt of the request…” (TAR 1601, One to Four Family Residential Contract, paragraph 18 D).

In the event of contract issues, seek legal advice. Most contracts select the option to “mediate” in the event of a contract issue, but one can always agree to disagree in mediation. It is always best to work together to resolve an issue and find an agreeable solution between parties. If a suit takes effect, remember… the losing party pays cost of the suit- attorney fees, court costs, and don’t forget, up to three times the amount of earnest money deposited! $1,500 can easily turn into $4,500.

Act in good faith and perform according to the terms of your contract, no one ever wins for trying to cut corners.

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