Ask Phyllis: a blog series of frequently asked real estate questions. Email us here
Customary Earnest Money Deposit
Dear Phyllis,
My daughter and her husband have been looking at La Crescenta homes on and off for about six months. Recently, they decided to become serious buyers and began working with the real estate agent who also sold us our home. However, their first offer turned into a fiasco. Our Realtor advised them to write tight contingencies: seven days for inspection, fifteen days for the loan, and ten days for the appraisal. In addition, they offered a 3% deposit on a $852,000 home listed at $835,000.
At that point, they learned there were several competing offers. As a result, the seller countered by demanding a $50,000 earnest money deposit. Our Realtor advised against this and explained that a 3% earnest money deposit is customary in the Foothills. Nevertheless, the sellers did not agree and ultimately sold the home to another buyer. In retrospect, we now wonder whether my daughter and her husband should have agreed to the increased deposit.
Looking back
Dear Looking Back,
I have been selling real estate for nearly thirty years, and this is a first. Typically, most purchase contracts specify that deposit issues are handled through mediation and arbitration. In most cases, the buyer cannot be liable for damages exceeding their deposit, not to exceed 3% of the purchase price. As a result, there is generally no need for such a large deposit.
In competitive situations, I have seen buyers offer larger deposits; however, I have never encountered a situation where a seller demanded more than 3%. In most transactions, escrow acts as an independent neutral third party. Once your deposit transfers to escrow, a refund can only occur in one of three ways, depending on the purchase contract:
- The buyer and seller sign escrow cancellation instructions, agreeing that the deposit will be refunded
- The matter proceeds through mediation and arbitration
- A court order is issued
Therefore, your real estate agent is correct—this demand was unreasonable. In fact, a $50,000 deposit was double the standard earnest money deposit. If your daughter had cancelled escrow after the physical inspection, an uncooperative seller could have delayed the return of her deposit for months. As a result, this could have impacted her ability to bid on another home or close escrow promptly.
Ultimately, it is difficult to look back and second-guess decisions made in the moment, but hopefully, there is a better home ahead for your daughter and her husband.
