Myth buster: Further on earnest money

In this prior blog entry, we explore the distinction between escrow deposits and earnest money in Ohio, and the fact that these two things are not a measure of or limitation on damages sustained for a breach of a real estate purchase contact.

This article seeks to bust a common myth about an escrow deposit: That a seller must return the earnest money of a buyer he claims is in breach before selling the home to a second buyer.

Here’s the scenario: Buyer #1 signs a contract to purchase a property with earnest money held in escrow by the Realtor, and then fails to perform.  Sometimes the buyer claims one of his contingencies was not fulfilled (financing, inspection, etc.) and the seller disagrees that buyer attempted in good faith to fulfill that contingency.  Other times, the buyer has just flat-out breached the contract.

In either scenario, seller has refused to consent to the release of the escrowed funds back to the buyer.  Indeed, he intends to hold the buyer responsible for the damages arising from the breach.

Now, Buyer #2 comes along, and the seller desires to sell the property to Buyer #2 free and clear of any claims of Buyer #1.  Does he have to release the escrowed funds to accept the second contract?  Does he have to waive the claims against Buyer #1?  No.

Many times the myth is advanced by an office manager of a realty company, either out of wisdom, to avoid unnecessary conflict and clean up loose ends, or because he is simply mistaken. [Indisputably, it may be advantageous to get a full release from Buyer #1 before proceeding with Buyer #2.]

But it would be entirely possible for a seller to sell to Buyer #2, and retain his claims for monetary damages arising from the breach against Buyer #1.  The seller is not required to release the earnest money to Buyer #1 at the time of signing contract #2.