Earnest Money
A cash deposit made by the buyer at signing of a real estate purchase agreement, held in escrow by the title company or other escrow agent. Commonly serves as a liquidated-damages pool in the event of buyer default. Whether it is refunded when a deal ends depends on the contract's termination and default terms.
Earnest money is the buyer's deposit with the escrow agent named in the contract, applied at closing and either refunded or kept as liquidated damages if the deal fails. Under the Texas Real Estate Commission resale contract (TREC No. 20-19, ¶ 5A), the buyer must deliver it within 3 days after the effective date.
Earnest money is a cash deposit made by a buyer at signing of a real estate purchase agreement, held in escrow by the title company or other escrow agent during the contract period. Earnest money serves two functions: (1) a tangible expression of buyer's good-faith commitment and (2) the typical liquidated-damages pool in the event of buyer default.
- Residential form
- Deliver within 3 days after the effective date (TREC No. 20-19 ¶ 5A)
- Who holds it
- The escrow agent named in the contract, not a party to it (TREC No. 20-19 ¶¶ 5A, 18A)
- Option period
- Timely termination refunds earnest money, and the seller keeps the option fee (TREC No. 20-19 ¶ 5B)
- Disputed release
- One party's written demand, then 15 days for the other to object (TREC No. 20-19 ¶ 18C)
- Title escrow rules
- Good funds before disbursement (Tex. Ins. Code §§ 2651.202, 2652.004)
Refundable vs. non-refundable
A commercial contract typically distinguishes a "refundable" period (the due diligence or feasibility period, during which buyer may terminate for any reason and receive earnest money refund) from a "non-refundable" period (after due diligence, where the deposit is at risk if buyer defaults). At closing, earnest money is applied to the purchase price. The transition from refundable to non-refundable is one of the most heavily negotiated terms in commercial real estate. On the TREC residential resale form, refund turns on the termination right used: termination in the option period refunds it (TREC No. 20-19 ¶ 5B), and so do later rights such as casualty damage the seller fails to repair by closing for reasons beyond its control (¶ 14).
Hard money structures
In competitive markets, sellers may demand "hard money", earnest money that is non-refundable from contract signing, regardless of due diligence outcomes. Hard-money structures shift risk substantially to the buyer and are typically used to demonstrate the buyer's seriousness, deter competing bids, or compensate the seller for off-market commitment. Buyers who accept hard money commonly complete much of their due diligence before signing.
Liquidated damages and forfeiture
Most commercial real estate purchase agreements provide that buyer's default results in seller's retention of earnest money as liquidated damages, typically the seller's exclusive remedy. Texas courts enforce liquidated damages clauses if (1) actual damages are difficult to ascertain and (2) the amount is a reasonable forecast of damages, not a penalty. Excessive earnest money can be reclassified as an unenforceable penalty. Some agreements preserve seller's right to elect specific performance instead.
Disputes and interpleader
Disputes over earnest money release at termination are common. The escrow agent (typically the title company) is bound by the contract and the parties' joint instructions; if buyer and seller disagree on a commercial deal, the title company commonly will not release without (a) a fully executed release agreement, (b) a court order, or (c) interpleader filing. On the TREC residential resale form, the escrow agent may pay one party's written demand if the other party does not object in writing within 15 days, though it may first require a written release of its own liability from all parties (TREC No. 20-19 ¶¶ 18B-18C).
Release of earnest money when a residential deal does not close
Under paragraph 18 of TREC No. 20-19:
- Either party or the escrow agent may send a release of earnest money to each party for signature.
- If a party does not sign, either party may make a written demand on the escrow agent for the earnest money.
- The escrow agent sends a copy of a one-party demand to the other party.
- If the escrow agent receives no written objection within 15 days, it may pay the demanding party, less unpaid expenses incurred on that party's behalf.
- A party who wrongfully fails or refuses to sign a release acceptable to the escrow agent within 7 days of receiving the request is liable to the other party for damages, the earnest money, reasonable attorney's fees and all costs of suit.
Is earnest money refundable under a Texas residential contract?
It depends on why the contract ends. A buyer who terminates within the option period gets the earnest money back, while the seller keeps the option fee (TREC No. 20-19 ¶ 5B). The resale form also refunds earnest money in several other termination situations, including casualty damage the seller fails to repair by closing because of factors beyond the seller's control (¶ 14). If the buyer defaults, the seller may terminate and keep it as liquidated damages, or instead seek specific performance or other relief (¶ 15).
Does the buyer get the earnest money back at closing?
No, it is used at closing. Under the TREC resale form, the escrow agent applies earnest money first to any cash down payment, then to the buyer's expenses, and refunds any excess to the buyer (TREC No. 20-19 ¶ 18B). The option fee is credited to the sales price separately (¶ 5A(4)).
Is earnest money required in Texas?
The TREC resale form does not set an amount. It leaves the earnest money blank for the parties to fill in. Once an amount is agreed, delivery is a contract obligation with a deadline. If the buyer misses the 3-day window, the seller may terminate or pursue default remedies, or both, by giving notice before the buyer delivers (TREC No. 20-19 ¶ 5C). Time is of the essence for that paragraph (¶ 5E).
Who holds earnest money before closing?
The escrow agent named in the contract, often a title company. The escrow agent is not a party to the contract, owes no interest on the deposit, and is not liable for a bank failure unless the bank itself is the escrow agent (TREC No. 20-19 ¶ 18A). Title escrow officers are licensed under Insurance Code Chapter 2652, and a title company may not disburse from its trust account until good funds for the transaction have been received (Tex. Ins. Code §§ 2651.202, 2652.004).
- A party who receives the other side's written demand for the earnest money has 15 days to deliver a written objection to the escrow agent, or the agent may release the funds (TREC No. 20-19 ¶ 18C).
- Wrongfully refusing to sign a release acceptable to the escrow agent within 7 days of receiving the request carries liability to the other party for damages, the earnest money, attorney's fees and costs (¶ 18D).
- The resale form sends unresolved disputes between buyer and seller to mediation, with costs split equally, while preserving the right to seek equitable relief in court (¶ 16).
- The prevailing party in a legal proceeding related to the contract recovers reasonable attorney's fees and costs (¶ 17).
- A Texas lawyer who handles real estate contract disputes can review the contract's termination and default terms against the facts.
In Texas commercial real estate deals, the earnest money terms are heavily negotiated. Buyers commonly push back on hard money structures before diligence is complete, automatic forfeiture for technical defaults, and escrow agreements that let the seller alone instruct a release. Sellers commonly ask for clear liquidated damages provisions, termination triggers tied to specific events, and earnest money increases ("additional deposits") at defined milestones.