Earnest Money Deposits in New Mexico

I am working on getting licensed to sell real estate in New Mexico, and I have learned some surprising things about how houses are sold in the Land of Enchantment. 

In the Grand Canyon State, if the Arizona Association of Realtors Purchase Agreement is used, when a buyer's offer is accepted on a property, the buyer deposits refundable earnest money, usually 1% of the sale price, with an escrow company. The Arizona buyer has several opportunities to cancel their purchase contract and get their earnest money deposit returned. 

1) The buyer has an inspection period, typically 10 days, and if they "reasonably disapprove" of anything about the property after doing the inspection period, they can cancel the purchase contract and get their earnest money refunded. 

2) If the seller won't make the repairs the buyer requests, the buyer can cancel the contract within five days of receiving the seller's response to the buyer's request for repairs.

3) If the buyer doesn't approve of information in the title report or the homeowner association disclosure, the buyer can cancel the contract within five days of the receipt of the unacceptable information. 

4) If the property doesn't appraise for the contract price, and the seller won't reduce the sale price to the appraised price, the buyer can cancel the contract. If the buyer is getting a mortgage, his lender won't let him pay more than the appraised price, and the buyer has no choice but to cancel the contract if the seller won't reduce the price. 

5) If the buyer notifies the seller no fewer than three days before close of escrow that they are unable to get a mortgage on the terms specified in the purchase contract, the buyer can cancel the contract. 

In all these cases, the buyer notifies the escrow company and the seller that they are cancelling the purchase contract, and if the notice to the escrow company is given within the time frames specified in the contract, the escrow company refunds the buyer's earnest money. The seller has no say in the matter, which is as it should be, because he agreed to all these cancellation contingencies when he accepted the offer. 

In New Mexico, if the buyer wants to cancel the contract because of one of the conditions above, which are all allowed in the New Mexico Purchase Agreement, the buyer still needs to get the seller's permission to cancel the contract. If the seller won't sign the cancellation agreement, the escrow company has to hold the earnest money until the buyer and seller work things out. The seller can put the house back on the market and accept a purchase contract from another buyer while holding on to the first buyer's earnest money. The second buyer has to use a different escrow company, one that's not holding the earnest money. Whether the seller has to disclose to buyer #2 that the seller is in a dispute over earnest money with buyer #1 is another question I couldn't get answered in my class. 

The escrow company sometimes bears the cost of the earnest money battle. If the buyer and seller can't agree on who is entitled to the earnest money, eventually the escrow company needs to get the earnest money off their books, and they will release the funds to the state's unclaimed funds account. Everyone loses. 

Rather than just authorizing the escrow company to release earnest money in accordance with the Purchase Agreement that the seller signed, the New Mexico Real Estate Commission invented the Time Off Market (TOM) Fee. This is a small, $50 to $350 non-refundable deposit paid directly to the seller by the buyer when the buyer's offer is accepted. The seller keeps the TOM fee regardless of whether the buyer buys the house or cancels the contract. 

The buyer and seller can negotiate when or if earnest money will be deposited. They might wait until the inspection, financing, title and homeowner contingencies have been met. But a Silver City broker I talked to said earnest money is usually only $500 to $1,000, which doesn't seem to me like enough money to justify a legal dispute.