Real Estate Transactions and COVID-19: How Can You Protect Your Earnest Money?

There is a mountain of uncertainty swirling around the economy at large these days, and the same is no different when it comes to real estate transactions.  Existing home sales tumbled 18% year over year for the month of April 2020, representing the largest single monthly slide since the recession of 2008.  Millions of unanticipated job losses and national quarantines have many would be buyers hopping out of the market until things stabilize, or at least a new longer-term trend is realized.

This uncertainty brings new questions that may not have existed before.  Pre Pandemic, it was well understood how Earnest Money was handled in a failed real estate transaction.  Purchase contracts typically contained three major contingencies, upon which the failure of each provided good cause to exit the transaction and receive reimbursement of all earnest funds.  Those contingencies are laid out below:

  • Inspection Contingency: This contingency grants the buyer a set number of days to conduct a physical home inspection. If the inspection reveals serious, undisclosed issues, the buyer can back out of the purchase without losing their earnest money.
  • Appraisal Contingency: This contingency comes into play if the property does not appraise at the purchase price. If that happens, the buyer can back out of the sale, sometimes because the bank will not approve a loan for more than the appraised value.
  • Financing Contingency: This contingency allows the buyer to back out if they are unable to ultimately get a mortgage to finance the purchase.

Perhaps the only traditional Contingency that would apply in today’s market would be the Financing Contingency, as many buyers find themselves unexpectedly furloughed or otherwise unemployed due to COVID-19.  What happens though if someone has not lost their job, but still wants to back out until the above mentioned stability returns?

Many are settling on force majeure language within contracts that fall through due to the coronavirus.  These clauses are defined as a provision in a contract that excuses a party from not performing its contractual obligations that become impossible or impracticable, due to an event or effect that the parties could not have anticipated or controlled.  Since the World Health Organization declared the virus a Pandemic in March, this is a reasonable use of the enforcement of a Force Majeure clause.

Some prudent purchasers are going one step further in protecting their earnest money, by inserting COVID-19 Addendums to their contracts.  It is debatable how far these should go, but they do offer flexibility in the contract for both parties, and a mutual understanding of the proverbial wrench that COVID-19 has thrown into the traditional marketplace.  Many buyers are using such clauses to incorporate longer timelines for deadlines such as financing or inspections.  Others incorporate unanticipated job losses during transactions.  More still have blanket extensions if either party was to come down with the virus itself.

Implementing these clauses into purchase contracts are a creative way to achieve what many are striving for in these times, and that is a continuation of business.  They offer protections on the off chance that unfortunate events do arise, but give the real estate market a chance to continue on in what would otherwise, and to date has proven to be, an uncertain and shaky market.

The attorneys at Thrift McLemore have worked tirelessly to represent our clients affected by COVID-19, and we are here for you too!  If you have any questions about real estate transactions resulting from COVID-19, please contact us by email at or by phone at 678-784-4150 today.