Who Gets Earnest Money If the Buyer Backs Out in Texas?

Real estate is a great way to build your business portfolio, but real estate transactions can be risky, even if the sale doesn’t happen. Whether you’re a buyer putting your savings into your future or a seller relying on the sale to move forward, one part of the deal carries weight for both sides—earnest money.

How much is earnest money in Texas? It’s typically a small percentage of the total purchase price, but the amount depends on the terms of your real estate agreement. You may pay thousands in earnest money, and The Vastine Law Firm, PLLC, can help ensure that no dollar you put toward a real estate deal is wasted or lost. Our team has over a decade of experience and gives the best straightforward advice to business owners who need to be smart about their money and time.

Requirements for a Real Estate Contract in Texas

Before discussing who gets the earnest money if a deal falls apart, it’s essential to understand what makes a real estate contract enforceable under Texas law.

Under Texas law, a real estate sales contract typically must:

• Be in writing,
• Identify the buyer and seller,
• Identify the property,
• State the purchase price,
• Include disclosures regarding the characteristics and condition of the property, and
• Be signed by both parties.
  

The earnest money deposit supports the buyer’s promise to buy, but the contract must still comply with all legal requirements. If not, the agreement may be invalid, and handling earnest money may become more complicated.

What Is Earnest Money?

Earnest money is a deposit the buyer makes to show serious intent to purchase a property. It’s typically paid shortly after an offer is accepted (i.e., when the parties are under contract). Once paid, earnest money is held in escrow by an escrow agent.

This deposit gives the seller confidence that the buyer isn’t wasting their time. It can also provide the buyer time to secure financing, conduct inspections, or complete due diligence—without risking losing the property to another buyer.

How Much Earnest Money Is Required in Texas?

How much is earnest money in Texas? There’s no fixed rule, but earnest money deposits may range from 1% to 10% of the purchase price. Given their nature, commercial or high-value residential properties may land on the higher end of earnest money deposits.

When Is Earnest Money Due in Texas?

The deadline for paying earnest money on real estate depends on the terms of your contract. You may have only a few days to come up with the necessary cash and deliver it to the escrow agent (usually a title company). And you will likely have to pay this amount with certified funds. Failure to deposit the money on time could void your protections under the contract or even terminate the agreement entirely.

Is Earnest Money Refundable in Texas?

Is earnest money refundable in Texas? The short answer is: Sometimes. Whether earnest money is refundable in Texas depends on:

• The terms of the contract,
• Whether the buyer cancels during the “option period,” and
• Whether either party breached the contract.
  

Below are a few common scenarios that might affect whether a buyer receives earnest money after walking away.

Buyer Cancels During Option Period

Many Texas contracts include an option period in which the buyer can back out for any reason (or no reason). The buyer pays a separate option fee, and if they cancel during this period, they usually get their earnest money back. 

Please note that the option fee is different from the earnest money payment and is rarely refundable.

Buyer Backs Out After Option Period Ends

If the buyer backs out after the option period and doesn’t have a valid reason under the contract, they likely forfeit their earnest money. In these cases, the seller typically receives the earnest money as compensation for the lost opportunity.

Buyer Terminates Based on a Contingency

If the contract contains valid contingencies and those conditions aren’t met, the buyer can usually terminate the contract and get a refund of their earnest money. Contingencies might include:

• The buyer being able to obtain a certain type of financing,
• The property meeting or passing certain inspection standards, or
• The property having a clean chain of title.

We can help you draft a real estate agreement containing the contingencies most important to your investment and your business’s needs.

A Party Breaches a Contract Obligation

While a contingency or contact term can protect a party, it can also increase the same party’s liability. For instance, a buyer might receive a refund if they cannot secure the necessary credit approval, but have to forfeit their earnest money if they do not give the seller their credit documentation by the contract’s deadline. And a seller might have to refund the earnest money if they don’t provide property disclosures on time or make the property reasonably available for an agreed-upon inspection. 

If you have contingencies in your real estate contract, ensure you comply with all obligations. Your compliance can help you avoid losing earnest money.

Buyer Backs Out After Property Destruction

Unfortunately, real estate transactions can have many steps, and the property might not make it to the closing date. In general, if a material part of the property gets destroyed or taken (through no fault of your own) before you receive title to and possession of the property, you get your earnest money back. And if the property is destroyed or taken (through no fault of the seller) after you take possession or receive the title, you typically must pay the contract price and do not get your earnest money back. These are default rules, so you and the seller can expressly agree to other terms. 

What Happens in a Dispute Between the Buyer and Seller?

Sometimes, there’s a dispute over who is entitled to earnest money. Typically, an escrow agent must release the funds within 30 days of a demand to the party entitled under the contract.

If there is a disagreement about the original contract terms, the buyer and seller can enter a new agreement about releasing the funds. If the parties cannot agree, they will likely have to resolve their issues in court.

We Can Help

Texas real estate deals move fast, and earnest money is just one piece of the puzzle. At The Vastine Law Firm, PLLC,  we help business owners and investors navigate every part of a real estate transaction from contracts to closing. We have over a decade of experience helping our clients avoid wasting their time and money. 

You might still be asking, How much is earnest money in Texas? And you might be wondering what earnest money means for your business deal. If so, contact a business attorney who understands real estate law in Texas. The Vastine Law Firm, PLLC,  is here to help you close deals, resolve disputes, and move forward with confidence. Call us or contact us online to schedule an appointment.

Resources:

• Promise or Agreement Must Be in Writing, Tex. Bus. and Com. Code § 26.01 (2005), link.
• Seller’s Disclosure of Property Condition, Tex. Prop. Code § 5.008 (2023), link.
• Tracey, Melissa Dittman, National Association of Realtors, “Earnest Money in Real Estate: Refunds, Returns and Regulations” (Nov. 13, 2024), link.
• Texas Real Estate Commission “Loan Assumption Addendum to Contract Concerning the Property at” (Draft – Nov. 7, 2022), link.