What happens if a buyer fails to deposit earnest money within the required TREC contract timeline?
If the buyer fails to deposit earnest money within 3 calendar days, the seller may terminate the contract at any time before the money is actually received.
Under the standard TREC One to Four Family Residential Contract, the buyer has 3 days after the effective date to deliver earnest money. If they fail to do so, the buyer is in default and the seller has the immediate right to terminate.
TREC Rules on Promulgated Contracts— One to Four Family Residential Contract (Resale) Paragraph 5
Select Your Answer Choice
Exam Explanation
What Happens If Earnest Money is Not Deposited on Time in Texas?
Paragraph 5 of the TREC One to Four Family Residential Contract outlines a very strict timeline for earnest money delivery. Sponsoring brokers must make sure their agents understand the gravity of missing this deadline.
Why the Correct Option is Right
Option C is correct because the contract states that if the buyer fails to deliver the earnest money within 3 days after the effective date, the seller may terminate the contract by giving written notice to the buyer. This right exists only before the buyer actually delivers the money, and while the buyer is in default.
Why the Other Options are Traps
- Option A is a trap because the contract is not automatically void. The seller must take an affirmative action to terminate the contract in writing.
- Option B is a trap because there are no automatic extensions for earnest money delivery in Texas contract law.
- Option D is a trap because escrow agents are neutral third parties and do not initiate lawsuits against defaulting buyers.
The Exam Trap
Remember that “calendar days” are used, not “business days.” However, if the 3rd day falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the very next business day.
Worked Texas Example
Scenario: Larry and Sarah sign a contract on Wednesday, making Thursday Day 1. The earnest money must be delivered by Saturday (Day 3). Larry’s agent fails to drop it off at the title company by Saturday. On Sunday,Sarah’s agent delivers a signed notice terminating the contract. Outcome: Sarah has legally terminated the contract. Larry was in default, and Sarah exercised her right under Paragraph 5 before Larry could deliver the late funds on Monday.