A real estate deal can fall apart after you sign a contract and pay an earnest money deposit. You typically place this deposit in escrow as a show of good faith and to demonstrate your intent to complete the purchase. If the transaction ends early, the contract, the reason for the failed deal and the applicable law determine who gets the money.
When you can get your deposit back
Your contract may include contingencies that let you cancel without losing your deposit. You must meet the contingency requirements and follow the contract’s notice deadlines.
Common situations where you may have the right to recover your deposit include:
- A failed financing contingency
- A qualifying inspection problem
- An unresolved title defect
Courts in both New York and New Jersey generally enforce contingency provisions as written. Following your contract’s notice requirements and deadlines is important because missing them can affect your right to recover the deposit.
When the seller may keep the deposit
If you back out without a contractual right to cancel, the seller may have the right to keep the deposit as liquidated damages. The contract must support that remedy and the circumstances surrounding the failed closing can affect the outcome.
When the seller backs out of the deal
Your remedies may differ when the seller fails to perform. Depending on the contract, you may recover your deposit and seek additional damages, though proving losses beyond the deposit amount can be difficult and will depend on the specific facts and contract terms. In some cases, you may also seek specific performance, which asks a court to require the seller to complete the sale. New York and New Jersey both recognize this remedy, although your contract and the circumstances will determine whether you can pursue it.
How New Jersey’s attorney review period affects your deposit
New Jersey residential contracts generally include a three-business-day attorney review period. During this period, either party’s attorney can review and disapprove the contract. If an attorney properly disapproves the contract during this period, the transaction ends and the buyer generally receives the deposit back.
What to do when you disagree about the deposit
If you and the other party disagree about the money, the escrow holder may continue holding the deposit until you resolve the dispute. You may need a signed release or court order before the escrow holder distributes the funds.
Whether you are a buyer or seller, the earnest money deposit is one of the most financially significant terms in a real estate contract. Understanding what your contract says about contingencies, notice deadlines and default remedies – before problems arise – can put you in a much better position if a deal falls through unexpectedly.
