Earnest Money Disputes: What Happens When Buyer and Seller Both Claim It

When the buyer and seller both claim the earnest money, the escrow holder usually keeps it until they sign a joint release or a court decides. The holder is neutral and generally won’t pick a side. Most disputes end with a signed release, a negotiated split, mediation or, less often, a lawsuit.

The size of the deposit shapes how hard each side fights. A $5,000 deposit and a $50,000 deposit lead to very different decisions about lawyers, so think about this when you decide how much earnest money to put down.

Why disputes happen

Most arguments come down to one question: did the buyer cancel for a reason the contract allows, on time? Common flashpoints:

• The buyer cancels after an inspection, and the seller says the notice came too late.
• The loan falls through, and the seller says the buyer didn’t try hard enough or missed a financing deadline.
• The buyer simply changes their mind after the contingency periods end.
• The seller fails to do something the contract required, and both sides blame each other.

The guide on when earnest money is refundable covers the contract terms that decide most of these.

Step 1: The release form

When a deal ends, the escrow holder or one of the agents sends a release. Both sides sign it and say who gets the deposit. If both sign, the holder pays out and it’s over.

The Texas resale contract (TREC form 20-19) spells this out. After termination, either party or the escrow agent may send a release, and the parties are expected to sign it. The form adds teeth: a party who wrongfully fails or refuses to sign a release within 7 days of receiving the request is liable to the other side for damages, the earnest money, reasonable attorney’s fees and all costs of suit.

Other states’ forms handle this differently. Read your own contract’s escrow section.

Step 2: Written demand

If one side won’t sign, the other may make a written demand. Under the same Texas form, the escrow agent sends a copy of the demand to the other party. If the escrow agent doesn’t receive a written objection within 15 days, it may pay the earnest money to the party who made the demand, less certain unpaid expenses.

An objection stops that process. Then the money stays where it is.

Step 3: Negotiation and mediation

Many disputes settle once both sides see the cost of fighting. A common outcome is a split. On a $10,000 deposit, a seller who is unsure of winning may accept $5,000 rather than pay a lawyer.

Some contracts require mediation before anyone sues. The Texas form says disputes not resolved informally will be submitted to a mutually acceptable mediation service or provider. A mediator doesn’t decide the case. They help the two sides reach a deal they both sign.

Step 4: Court

If nothing else works, someone goes to court.

Small claims

For smaller deposits, small claims court can be a cheap option. Each state sets its own dollar limit and rules. Check yours before you file.

A lawsuit for breach

A seller may sue a buyer for breach of contract, and a buyer may sue a seller the same way. Some contracts also let the buyer ask a court for specific performance, which means forcing the seller to sell. The Texas form, for example, gives each side a choice between enforcing the contract and taking the earnest money.

Interpleader

When an escrow holder is stuck between two claims, it may be able to deposit the money with a court and ask the court to decide who gets it. This is called interpleader. It lets the holder step out of the fight. Whether and how it’s used depends on state law and the escrow agreement.

Liquidated damages: how much the seller can keep

Many contracts say that if the buyer defaults, the seller keeps the earnest money as liquidated damages. That means the deposit stands in for the seller’s actual losses, and the seller usually gives up the right to sue for more.

Some states limit this. California is the best known example. Under California Civil Code section 1675, when the buyer intends to live in a home with one to four units:

Deposit kept	Presumption
3% of the price or less	Valid, unless the buyer shows the amount is unreasonable
More than 3%	Invalid, unless the seller shows the amount is reasonable

On a $500,000 home, 3% is $15,000. A seller trying to keep a $25,000 deposit would have to prove that amount is reasonable. The clause also has to meet the form requirements in sections 1677 and 1678, and the deposit must actually have been paid.

Other states don’t have this rule. Your contract and state law decide.

How to avoid a dispute in the first place

1. Put every contingency deadline on your calendar the day you sign.
2. Send cancellation notices in writing, using the form or method your contract requires.
3. Keep copies of every notice and proof of when it was sent.
4. Keep your deposit at a level you could afford to lose if things go badly.
5. Talk to a real estate attorney before you refuse to sign a release.

The earnest money calculator shows what different deposit sizes look like on your price. A deposit you can live with makes every later decision easier.

Related guides

Before any of this, the deposit had to be paid and confirmed. The guide on how to pay earnest money covers that. If you’re thinking of offering a large deposit to win a house, read about using a bigger deposit in a competitive offer first.