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Customary Earnest Money Deposit

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Dear Phyllis,

My daughter and her husband have been looking at La Crescenta homes on and off for about six months. They are now serious buyers. They are working with the real estate agent who also sold us our home. Their first offer was a fiasco. Our Realtor advised us to have tight contingencies: seven days for the inspection, fifteen for the loan and ten for the appraisal. They offered a 3% deposit on an $852,000 home listed at $835,000. From what we were told there were several offers and the seller countered us that they wanted a $50,000 earnest money deposit. Our Realtor  advised that this was unreasonable and that a 3% earnest money deposit is customary in the Foothills. The sellers didn’t agree and  sold the home to another buyer. In retrospect we are wondering if they should have agreed to the increased deposit.

Looking back

Earnest Money Deposit

Dear Looking Back,

I have been selling real estate for nearly thirty years and this is a first. Most purchase contracts opt that deposit issues be handled by mediation and arbitration. In this instance the buyer cannot be liable for damages exceeding their deposit, not too exceed 3% of the purchase price. Thus, there is no need for such a large deposit.

In competitive situations I have seen buyers offer larger deposits, but I have never had an instance where a seller demanded more than 3%. Escrow is an independent neutral third party. Once your deposit transfers to escrow a refund to you can only  happen one of three ways. The manner determined by the purchase contract:

1) Buyer and seller signed (escrow) cancellation instructions stating the deposit is to be refunded
2) Mediation/arbitration
3) Court order

Therefore, your real estate agent is correct, this was unreasonable. Fifty thousand dollars was double the standard (customary) earnest money deposit. Assume your daughter cancelled escrow after their physical inspection. An uncooperative seller could mean months before she and her husband received their deposit back. This could have impacted them bidding on another home and being able to close escrow. It’s hard to look back in time to decide if they should have agreed, but let’s believe there is a better home out there for your daughter and her husband.

Best of luck to your daughter and her husband on finding a better home with a more reasonable home seller.

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