When buying or selling a home in Texas, you may come across the term “earnest money.” This is a small deposit the buyer gives to show they are serious about the deal. Think of it as a promise. If everything goes right, the money goes toward the purchase. If the deal falls apart, who keeps the money depends on the contract. That is where earnest money forfeiture clauses come in.
In real estate transactions, earnest money serves as a good-faith deposit showing a buyer’s serious intent to purchase. However, when the deal doesn’t close on the agreed date, misunderstandings about what happens to the earnest money can spark disputes. One common provision is a clause stipulating that if the confirmed closing date is missed, half of the earnest money is forfeited. Clear explanations are essential to avoid confusion, safeguard interests, and ensure smoother transactions for both buyers and sellers.
In This Article:
- Understanding Earnest Money and Its Role in Texas Property Law
- How Much Earnest Money Is Normal in Texas?
- Why Are Closing Dates So Important?
- What Is a Half-Forfeiture Clause?
- Texas Law and the Enforceability of Forfeiture Clauses
- Common Buyer and Seller Mistakes That Lead to Disputes
- How to Prevent Unfair Forfeiture
- Customizing and Enforcing Earnest Money Terms
- Takeaways for Brokers and Real Estate Investors
Understanding Earnest Money and Its Role in Texas Property Law
What Is Earnest Money?
In Texas, earnest money deposits often range from 1% to 3% of the property’s purchase price, though this varies based on market conditions, property type, and negotiation outcomes. If you are buying a $300,000 home and earnest money is 1% of the home’s price, your earnest money might be $3,000. When both sides sign the home contract, the buyer gives this deposit. It goes into an escrow account, not straight to the seller. That means it is held by a neutral third party like a title company. The money stays there until the deal is complete or canceled.
This offers protection to both parties. The buyer shows they are serious. The seller can move forward with confidence. Understanding Texas real estate earnest money rules helps prevent disputes. These rules shape how funds are handled and returned. They also link closely with escrow rules that manage the flow of money during sales.
Escrow Rules and Why They Matter
Escrow accounts are used to make sure no one gets cheated. The funds are not released unless both parties agree. If something goes wrong and the deal is canceled for valid reasons, the buyer often gets the money back. If not, the seller may have a right to some or all of it. That is where earnest money forfeiture clauses start to matter. They guide how escrow officers decide what happens next.
In Houston or nearby regions, many buyers and sellers consult a houston real estate contract lawyer to understand these terms. Using proper contracts and writing clear forfeiture clauses is key. When everything is in order, fewer conflicts arise over deposits.
How Paragraph 18 of the TREC Contract Handles Disputed Earnest Money
Paragraph 18 of the TREC 1-4 family residential contract lays out the steps for what happens when there’s a dispute over who should get the earnest money after a contract falls apart. Here’s how it works in practice:
If the contract is terminated, either the buyer, seller, or escrow agent (usually a title company) can start the process by sending a written demand—a formal request—to release the earnest money. Once a demand is sent, the other party has 15 days to make a written objection if they disagree. If no objection comes in on time, the escrow agent is allowed to release the funds to the party who made the demand, minus any expenses owed.
What counts as proper notice? While email and text messages are becoming more accepted in Texas, certified mail is still your safest bet, especially if you ever need to prove to a judge that a notice was delivered. Phone calls, on the other hand, just don’t cut it for these purposes.
If a party refuses to sign a release within 7 days of being asked, the contract says they could be on the hook for damages, including attorney’s fees and costs of suit—not just the earnest money itself.
The contract isn’t crystal clear about exactly when these windows start, but it’s wise to assume that all deadlines begin as soon as a written demand is sent. In other words, don’t wait until the last possible moment to act. Clear, timely communication is key to keeping everyone’s interests protected and making sure the process runs as smoothly as Texas barbecue on a sunny day.
How Much Earnest Money Is Normal in Texas?
Most earnest money deposits in Texas fall around 1% of the purchase price. Still, no rule says it has to be that number. It could be higher in hot housing markets, where offers are very competitive. In some rural or cooler markets, buyers may put down less. Buyers and sellers decide on the amount when writing the contract.
Sometimes, sellers ask for more due to unique property concerns. Oil or mineral rights could make the deal more complex. In such cases, a mineral attorney might help draft clear terms. That ensures the earnest money reflects any added risk. This is helpful when oil lawyer issues intersect with home purchases.
Why Are Closing Dates So Important?
The closing date is a critical deadline in the contract, defining when ownership formally transfers from seller to buyer. It triggers the final execution of documents, loan funding, and release of funds.
The Legal Weight of a Closing Date
The closing date in a real estate deal is not just a suggestion. It is a promise written into the contract. This is the day when the buyer pays the rest of the money and the seller hands over the keys. Delays can mean risk, and sometimes, penalties. If a buyer delays without a good reason, they may lose part of their deposit. The seller may keep some or all of the earnest money.
A texas earnest money dispute attorney will often deal with these cases. Delays often spark arguments over who gets the deposit. If the forfeiture clause is written clearly, those disputes are easier to solve. That is why these clauses need strong, simple terms.
Reasons Why Closings Get Delayed
Many things can cause delays in closing a home deal. Some buyers have problems getting a loan approved on time. Others may not finish inspections or appraisals soon enough. Sellers might face title delays due to unresolved liens. Sometimes, one side does not respond fast enough. Even small delays can lead to big conflicts if deadlines expire without action.
If a delay seems likely, both parties should talk early. Real estate agents, brokers, and legal advisors can help manage this. If things are handled properly, deals can often be saved just by requesting extensions.
Common Reasons Closings Are Delayed
- Loan approval delays
- Title clearance issues
- Appraisal discrepancies
- Inspection objections
- Document preparation errors
What Is a Half-Forfeiture Clause?
Understanding the 50% Clause
A half-forfeiture clause is common in Texas real estate contracts. It says that if the buyer causes a delay or can’t close, the seller can keep 50% of the earnest money. The other 50% goes back to the buyer. For example, if the deposit is $4,000 and the buyer is at fault, the seller might get $2,000.
This clause also serves as a fair middle road. It gives something to the seller for lost time—but does not punish the buyer too hard. That balance keeps both sides calm. Many real estate lawyer for closing delays suggest this practice when delays are likely.
When and Why It Applies
This clause only applies when the buyer’s actions delay or break the deal. If the seller causes the delay or if both decide to walk away, it may not apply. But if the buyer breaks contract rules, it can be enforced. That is why it is important to understand your responsibilities and stick to deadlines.
Buyers and sellers should always read these clauses carefully. Mistakes can cost thousands of dollars if these rules are ignored. Property law in Texas backs such clauses if they are not hidden or unfair.
Texas Law and the Enforceability of Forfeiture Clauses
What Texas Law Says
In Texas, courts generally support clear and fair forfeiture clauses. Contracts must clearly lay out how much a seller gets to keep. Buyers must also understand these terms when signing. If the language is vague or misleading, courts might throw out the clause. That is why clarity is so important during contract writing.
The texas real estate earnest money rules do not allow unfair surprises. Texas courts often look at how much each side knew during signing. They also look at how much money is at stake. You need to balance fairness with your rights. That approach helps keep deals stable and enforceable.
Examples from Real Deals
In one case, a buyer missed the deadline due to no financing. The seller wanted to keep the full deposit. They had a clause stating they could. But because there was no clear notice or warning clause, the court sided with the buyer. In another case, the seller won half the money because the buyer backed out late for no reason.
Knowing these past outcomes can guide how future deals are written. No one wants to end up in court. That is why agreements need solid structure and understanding. A texas lawyer skilled in contracts can help set those terms in the right way.
Relevant Statutes and Case Law
Earnest money forfeiture must comply with Texas contract law, including the Texas Property Code and common law principles surrounding liquidated damages. Clauses must not contravene public policy or constitute an unenforceable penalty under Texas jurisprudence (e.g., Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991)).
Common Buyer and Seller Mistakes That Lead to Disputes
What Buyers Often Miss
Many buyers assume their earnest money is fully safe if things go wrong. That is not always true. Financing failures, inspection delays, appraisal issues, or poor timing can all lead to partial or full forfeiture. They may not check title records or zoning rules early enough. Any of these oversights might break the contract terms.
Even forgetting to ask for an extension could cause problems. Buyers should track deadlines on a calendar and talk soon if delays come up. It is also smart to include clear contingencies that protect their investment. Without those, they risk losing money.
What Sellers Often Get Wrong
Sellers may hurt their own deals by ignoring valid objections from buyers. If the property has title defects or active liens, the buyer could walk away legally. They might even get their earnest money back in full. That outcome can be avoided by clearing title issues early.
A seller should not assume a buyer is just backing out. They need to review the reasoning, then work to fix the issue when they can. Good records and quick repairs help avoid unnecessary blame and disputes. A real estate broker can keep both sides informed when problems arise.
How to Prevent Unfair Forfeiture
Protective Clauses in a Home Contract
Buyers can protect themselves by including “contingency clauses.” These allow them to back out if financing fails or inspections turn up issues. Sellers also benefit from clauses that clearly spell out what happens in all common situations. The clearer the contract, the fewer the disputes.
It is also wise to have a property law expert review any unique terms. For example, sellers with mineral rights might need a clause to limit forfeiture unless the buyer accepts those terms. Purchasing property tied to oil production can involve different rules.
Stay in Touch, Avoid Surprises
One key to protecting earnest money is strong communication. If you expect a delay, let the other side know soon. Many parties are open to extensions if they are asked before the deadline. Ignoring the issue until after the closing date increases the chance of forfeiture.
Agents and escrow officers should also stay involved. Their updates help prevent last-minute issues and misunderstandings. Everyone benefits from teamwork in real estate deals.
Customizing and Enforcing Earnest Money Terms
Create Flexible and Clear Clauses
No two deals are the same. Some contracts give full refunds if delays are due to appraisal timing. Others use a “sliding scale,” where the buyer loses more of the deposit as delays stack up. These types of customized clauses allow flexibility and fairness.
Both sides should decide ahead what they consider fair. The contract should show this clearly. There’s less stress when everyone knows what the money rules are.
Enforce Smartly Without Conflict
Sometimes, parties disagree over whether the forfeiture clause should apply. These disputes can go to court. But many are handled through mediation or arbitration. These tools help avoid legal fees and delays. In some cases, the texas earnest money dispute attorney might be involved, but it is rare when contracts are clear.
Using conflict resolution techniques early can save both money and relationships. Texas law supports smart, peaceful resolutions over lawsuits.
Mediation’s Role in TREC Earnest Money Disputes
When a dispute arises over earnest money in a Texas real estate contract, clear steps must be followed. After one side gives the title company a written demand for the funds, both parties—and their brokers—must sign a release before anything is paid out. If either side objects in writing within fifteen days, the money stays put while things are sorted out.
Mediation then steps in as the next phase. Under the current Texas Real Estate Commission (TREC) contract, mediation is not just an option—it’s now the default method for handling these disagreements unless both sides opt out by specially amending the contract. This approach ensures that both buyers and sellers are given a formal, low-conflict way to resolve their differences before heading to court. Mediation offers a chance to settle matters efficiently, often with less expense and frustration for everyone involved.
Takeaways for Brokers and Real Estate Investors
Best Practices to Remember
For a real estate investor, understanding these clauses protects profits. For a broker, it helps limit missed closings. Avoid common risks by drafting fair terms, explaining forfeiture rules early, and keeping all parties updated. Even seasoned investors or brokers benefit by sticking to the basics.
Make sure buyers and sellers understand the role of earnest money. Confirm everyone knows deadlines. If needed, work with a texas lawyer to review complex home contracts involving escrow. With simple communication and clear rules, many problems can be avoided in advance.
Negotiating Earnest Money Terms
Customizing Forfeiture Provisions
Parties can negotiate whether forfeiture applies only to certain breaches, whether the amount should be fixed or proportional, and whether mutual extensions are allowed without penalty.
Alternatives to ‘Half-Forfeiture’ Penalties
- Graduated forfeiture (e.g., 25% for minor delays, 50% for major delays)
- Full forfeiture for willful breach only
- Escrow agent discretion clauses
Conclusion
Earnest money is more than just a deposit—it shapes trust in a home sale. A well-written forfeiture clause can help solve problems before they grow. From closing delays to title issues, these clauses guide what happens when deals fall apart. Buyers and sellers who stay informed reduce their risks. Real estate brokers and industry professionals who follow these steps help everyone involved.
If your transaction involves unique details like oil or mineral rights, or you hit a delay, having guidance early can lead to better outcomes. At Daughtrey Law Firm, we help clients better understand property contracts so fewer surprises happen later.
