When a real estate transaction fails in Portland, OR, who gets to keep the earnest money, the buyer or the seller?

The buyer has three ways out of the standard earnest money agreement:

  • Property disclosure law
  • Inspection contingency
  • Preliminary title report
  • Property disclosure law

The property disclosure is the buyer’s right of revocation under Oregon law. It consists of four pages which list, in check-box format, general statements of what the seller knows about the house since they’ve owned the home. The buyer has 5 business days to revoke his/her offer for no reason whatsoever after RECEIPT of this document. If the buyer is not given the disclosure form until just prior to closing, the buyer can technically terminate the transaction and keep the earnest money up to closing. However, most listing agents and brokerages stay on top of this law and issue the disclosure form immediately upon offer acceptance.

Inspection Contingency

The standard inspection contingency is 10 business days after offer acceptance. After the home inspection, the buyer typically issues an inspection addendum and asks for repairs or a price reduction in lieu of repairs. If the buyer decides to terminate the transaction instead of asking for repairs, the buyer keeps the earnest money.

Preliminary Title Report

The preliminary title report is issued by the escrow officer within 5 business days of offer acceptance. The buyer then has 5 additional business days, once they receive their mailed copy, to challenge the title report if any unacceptable liens or encumbrances show up on the report or if any codes, covenants and restrictions (CCR’s) appear which would interfere with the buyer’s enjoyment of the property. If the seller can remove the lien/encumbrance or change the CCR, the buyer cannot terminate the transaction based on the report. However, if the seller cannot remove the item in question, the buyer can back out and keeps the earnest money.

All of these contingency periods normally run concurrently within 10 business days after offer acceptance. Once all three contingencies have been satisfied, and if the buyer has not terminated the transaction as a result of one of these contingencies, then the buyer’s earnest money becomes at risk if the buyer wants to terminate prior to closing. The earnest money would then go to the seller as liquidated damages for keeping their house off the market while waiting for the buyer to perform.

There is one exception to the seller’s ability to keep the earnest money after all contingencies have been satisfied, and that is if the buyer’s financial status changes in the form of a job loss, job transfer outside of 50 miles from the subject property, or some other unforeseen financial set-back that would preclude the buyer’s ability to secure a loan.