What happens to a buyer's deposit if they back out of a deal without a valid reason?

When a buyer backs out of a deal without a valid reason, the deposit is typically forfeited to the seller. This is often established in the purchase agreement, which outlines the consequences of a buyer's default. The intention behind this arrangement is to compensate the seller for the inconvenience and potential losses incurred due to the buyer's withdrawal from the transaction.

Forfeiture of the deposit serves as a deterrent for buyers to back out without legitimate cause and provides sellers with some assurance that they will not be left completely empty-handed if the sale does not go through. The deposit often represents earnest money, which signals the buyer’s commitment to the purchase. If the buyer fails to adhere to the terms set forth in the contract, the seller may have the right to claim the deposit as a form of liquidated damages.

In contrast, deposits being automatically returned or held in escrow represent situations where valid reasons for backing out exist or where contractual terms dictate differently, like in cases of contingencies. The real estate agency receiving the deposit does not normally occur unless specifically agreed upon in the contract or local laws dictate that scenario.