Can You Get Earnest Money Back During a Pandemic? Discover Your Options

You found the house of your dreams and are in the middle of the closing process … but you just found out one of the sellers tested positive for COVID-19, and you’re immunocompromised. Or, you’re unsure how to move with shelter-in-place rules and nonessential travel banned.

There’s a lot of uncertainty surrounding the economy, the coronavirus, and any major transaction right now. Before you think about backing out of the purchase, take a deep breath.

The reasons that you wanted to buy or move in the first place still exist. You might just want to push the closing date out, or add provisions to protect your move. But if you decide to exit the deal, can you back out of it and get your earnest money back in the middle of a pandemic?

Add a COVID-19 real estate addendum

When writing your purchase agreement, you can add addenda and contingencies that protect yourself. The most common is an inspection contingency, but others may apply to financing or a closing date. Realtor associations in many states have begun to offer versions of an addendum related to coronavirus that agents can use with clients.

Jason Gorman is an experienced agent in Minnesota, where the Realtor association distributed a coronavirus addendum to members at the beginning of March. He says that “we’ve been using it on all of our files to keep everything safe. It allows people a grace period to extend closing dates.”

He has even been adding it retroactively to pending transactions, as most buyers and sellers have been reasonable and “it’s in everyone’s best interest to have it added.”

Other agents are working with lawyers to draft an addendum. A coronavirus addendum should definitely be included in any new contracts, but they can also be added to contracts already underway to help extend deadlines and protect everybody. As long as everyone agrees on them, you can add them to a signed agreement.

Kelly Springer, Esq., is a partner at law firm Willenbring, Dahl, Wocken, and Zimmermann, PLLC, specializing in real estate, probate, and family law. She says that changes to real estate contracts are common, and “few contracts go all the way through to the end without amendments.”

“Some examples of common changes would be: reductions in purchase price to address defects found in the property inspection, or extensions of the contract to address title issues or other conditions precedent [conditions required to complete the sale].”

Don’t be afraid to ask. Sellers have motivation to work with you. After all, they have the same concerns about moving, a job, or the home they’re buying.

What goes into an addendum?

If you’re writing a purchase agreement now, or the seller has agreed to add a coronavirus addendum, what should it include? The addendum should address timing, financial worries, and health concerns.

Time constraints

Real estate contracts include timelines for how long the buyer has to get an inspection, an appraisal, and to close on the house. Depending on your state, you might not be able to get most or all of these things done on the timeline during the pandemic.

In Minnesota, for example, the state considers real estate an essential business and still allows closings and inspections. But in other states, appraisers and inspectors may be considered nonessential, and limitations could therefore apply to their work — they might have to appraise your home remotely or delay the inspection. Title work can be completed in an office, but if you can’t find someone to perform an alternative appraisal (or the bank won’t accept anything other than a standard 1004 appraisal), you might have to wait until appraisers can get back to work.

The addendum should specify how much extra time you need to accomplish these tasks, and it should also provide an extension for closing, usually 30 days. If the closing still doesn’t take place after the extension, then the buyer or seller can renegotiate the deal or walk away. If the seller walks away, the buyer should get their earnest money back, even in a pandemic.

Financial problems

Maybe you need to back out of the sale because you lost your job. Most purchase agreements should already contain a financing contingency that allows the buyer to back out of the sale if they can’t obtain a mortgage.

Since the pandemic started, Gorman says that he has had “a couple of people that have lost jobs on pending transactions, and cancel because weren’t able to obtain financing anymore.” Additional language in a COVID-19 addendum about income and financing may be unnecessary, but if you’re truly worried, talk to your agent and a lawyer.

What if you decide you’d rather cancel the sale and keep your down payment as a nest egg — just in case? With so much uncertainty, keeping that money in the bank could feel safer. Many buyers struggle with buyer’s remorse when they see such a large sum go out of their bank account. Unfortunately, it’s unlikely that the addendum would protect you in this case, and you’d probably lose your earnest money.

Health issues

There could be a clause in the contract about what happens if a buyer or seller passes away during the transaction, which could (unfortunately) apply in this situation as well. However, these clauses usually relate to estates and probate deals and typically only delay a sale. If you have a signed and executed contract, you may have equitable title to the house, while the seller’s estate now has legal title.

Equitable title means that you have a right to obtain full ownership of a property (or property interest), and the seller’s estate or heirs must still sell it to you. Legal title, or land ownership, transfers at the final sale. If the seller passes from the coronavirus during the sale, without a COVID-19 addendum, at most, the closing would be delayed.

That’s if their heirs want to proceed in selling the house. In Springer’s experience, “the contract may need to be extended until someone can be legally appointed as administrator of the estate, so they have authority to transfer good title.” If they were unhappy about the sale, they might be willing to negotiate terminating the contract and returning your earnest money.

If the seller knows that they have been exposed to or have COVID-19 and don’t disclose that to the buyer, it could potentially nullify the contract in some states. At least one state — Texas — has advised sellers that COVID-19 counts as a “known health hazard,” and they must disclose if they know they have it.

Sellers usually have to disclose any known health risks related to the home in states where a seller’s disclosure is required, such as the presence of lead paint, gas leaks, asbestos, or other property defects. They don’t necessarily address the current occupant’s health condition. While you may be certain that the presence of COVID-19 definitely qualifies (or definitely does not qualify) as a known health risk, it’s legally open to interpretation.

Generally speaking, you can’t terminate a contract based on a diagnosis (and get your earnest money back) unless the seller has withheld information about the house. You may be in a gray area, and you should consult with an attorney, if the diagnosis came after executing the purchase agreement.

When should I just walk away?

If you are already under contract, don’t have an addendum, and the seller’s disclosure rules don’t apply to your situation, then you might have to make the choice between getting your earnest money back and getting out of the sale. While Gorman says that most sellers have been reasonable, it’s not a guarantee that the seller will agree to adding a post-contract addendum.

There are reports that some buyers are trying to use the legal concept of force majeure to try to get out of contracts. The argument of force majeure is that an unforeseen, unpreventable event keeps them from fulfilling their contracts, which they are deeming to be the coronavirus. Therefore the contract is null, and they should be allowed to exit it without penalty.

Keep in mind that if you only put down a small amount of earnest money — say, $1,000 — you’ll quickly spend just as much, if not more, paying a lawyer to argue force majeure to cancel your purchase and get your earnest money back. Talk to your agent about what makes the most sense for you, financially and otherwise.

Remember that most people get nervous about buying a house all the time, not just during a pandemic. According to Gorman, “this coronavirus is new — but being nervous, fearful, and anxious about going through the process of moving is not.”

Header image source: (Micheile Henderson / Unsplash)