All about the earnest money deposit
Ask Phyllis: a blog series of frequently asked real estate questions.
Dear Phyllis,
Your column is one of the first things I look for in the CV Weekly. I know real estate has changed since I purchased my home. However, I didn’t realize it had changed so much. My daughter had her townhome in escrow. The buyers inspected, and everything seemed fine, but the buyer canceled a week before the close. There was not a good reason given for the cancelation.
She had already started packing, and now her townhome is a mess. I am confused because it seems that she should be able to keep the buyer’s escrow deposit. However, her Realtor says it must be returned to the buyer. This doesn’t make sense; it seems unfair to a seller and gives the buyer all the rights. Can you explain the purpose of the deposit? Clair
Dear Clair,
Thank you for the compliment and the question. To ensure the contract’s validity, both parties must provide (financial) consideration. The funds deposited in escrow are commonly called earnest money or a good faith deposit. It is typically 3% of the purchase price. When escrow closes, the funds are applied to the buyer’s down payment and closing costs.
Most California purchase agreements provide multiple ways for buyers to withdraw from a sale and have their earnest money returned. The buyer must remove all contingencies in writing before their deposit is at risk. Common contingencies are:
Financing: A buyer gets their earnest money deposit returned if they cannot obtain a mortgage.
Appraisal: A buyer can have their deposit returned if the home appraises for less than the purchase price.
Condition: If a buyer does not approve of the property’s condition, the seller refunds their deposit.
Disclosures: The buyer must accept all disclosures and the title search, or they can have their deposit returned.
Of course, I sympathize with how frustrating this is. Your daughter’s agent may not have adequately kept her updated. Typical time frames for removing these contingencies are 17-21 days for the loan, 10 days for disclosures, and 14 for the appraisal. Therefore, I usually advise my clients not to engage in major packing until they have removed all contingencies in writing.
