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Solving Earnest Money Disputes as Painlessly as Possible

Silver linings during coronavirus: more quality family time, guilt-free binge watching, coronavirus culinary creations (and subsequent guilt inducing binge eating, but who cares?), mastering bonzai and…free online mediation with the South Carolina Association of Realtors! Are you really excited about that last one? Not as much as you are for binge eating and binge watching, but, yes, you are- as I will explain below. And, here is your link to more information about the free online mediation: https://www.screaltors.org/wp-content/uploads/2020/03/OnlineMediation.pdf

Here’s our scenario: you just found out that your buyer is backing out of the deal, a deal that you busted your butt to bring together. You prepare a Form 518 Release of Agreement/Contract to Buy and Sell Real Estate, submit it to the listing agent, and find out that the seller wants to keep the earnest money. You think that your client has a legitimate reason to terminate the contract, and she deserves the earnest money. The economy is not going great, and your client keeps calling you because she needs the $1,000.00 as a deposit on another home. Sound familiar? What do you do now? Per the January 2020 iteration of the South Carolina Association of Realtors contract you have two options- mediation (did I mention it is free?) or interpleader.

The SCR website defines mediation as “assisted compromise where two parties reach an agreement with help from a trained REALTOR® mediator.” Did I mention that SCR is offering free online mediation? In a nutshell, if you and the other agent get your clients to mediate (which is easier said than done), the process and outcome are usually positive. In the end, however, it is a compromise, and when two parties are involved in a highly emotional dispute, it may not work.

If that is the case, then the only option is an interpleader action, which is litigation. Your buyer will tell the judge her side of the story. The seller will tell his side of the story. Then, the judge will decide who gets the money. In addition, the contract calls for the non-prevailing party to the interpleader to pay the attorney’s fees and costs of the escrow agent. This cost can be more than the amount of the earnest money in dispute (make sure to emphasize this to your client). In addition, I have been involved in interpleader actions that took almost six months to complete (have them call me if you want, and I will tell them). If you have entrenched parties, then you may not have a choice but to endure with your client, but, personally, I am not a fan.

As a pretext to your discussion with your buyer on how to proceed, you need to emphasize that her decision needs to be as much of a business decision as possible. It does not help either party to prolong the impasse. Therefore, maybe your client will think about compromise without doing formal mediation or interpleader. Maybe you split the earnest money 50/50 and move on. Or maybe it is a 75/25 percentage split.

As the adage goes, an ounce of prevention is worth a pound of cure (kind of appropriate given today’s health environment). With that in mind, maybe it is a good practice to set expectation/game plan for your client concerning this issue. Of course, you do not want to dampen the enthusiasm of your new buyer/seller, but you do want to manage expectations. Take a minute and run through the scenario I laid out at the beginning. What would the buyer want to do? You will probably not have to deal with an earnest money impasse, but if you do, you certainly will look smart for preparing your buyer for a less than ideal situation.

By Brian Ponder

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