Earnest Money

Earnest Money in Texas ## How Earnest Money Works Earnest money is a good-faith deposit made by the buyer to demonstrate serious intent to proceed with the purchase. Unlike the option fee (paid directly to the seller), earnest money is held in a neutral escrow account — typically at the title company, or sometimes at the broker's trust account. The contract specifies the amount, the holder, and the delivery deadline (typically within three business days of the effective date). Failure to deliver on time: If the buyer fails to deliver earnest money by the contract deadline, this is a default by the buyer. The seller may terminate the contract and pursue remedies. ## Remedies for Default If the buyer defaults (refuses to close without a valid contractual basis): - Seller may retain the earnest money as liquidated damages, OR - Seller may pursue specific performance (a court order requiring the buyer to close) - The seller generally cannot pursue both simultaneously If the seller defaults (refuses to close or misrepresents the property): - Buyer may pursue specific performance (compelling the sale), OR - Buyer may recover the earnest money and pursue actual damages ## Releasing Earnest Money — A Broker Cannot Decide Alone This is a critically tested area: a broker holding earnest money in a trust account cannot release it unilaterally when the parties dispute who should receive the funds. Release requires one of three things: 1. A written agreement signed by both parties (mutual release) 2. A court order directing disbursement 3. The specific conditions in the contract being met (e.g., proper termination during the option period) TREC has no jurisdiction over earnest money disputes. If the…