Understanding Earnest Money Deposits: What You Need to Know as a Seller

The earnest money deposit is the initial money the buyer puts down at the beginning of escrow, usually 2-4% of the purchase price. Escrow instructions are not generated, and escrow doesn’t officially “Open” until this happens.
In a normal transaction, the Deposit becomes part of the buyer’s down payment. But let’s say the buyer backs out of escrow. Can the seller keep that deposit? In almost every scenario, the answer is NO.
The Purchase Contract gives the buyer a standard 17 days to do all of their inspections on the property and get their loan in place. Within the first 17 days, a buyer can back out FOR ANY REASON and get his or her full deposit back.
At the end of the 17 days, known as the contingency period, the seller will ask the buyer to sign off their deposit on a form knows as the CONTINGENCY REMOVAL. This is a very big deal, and the stage when everyone can relax a bit. But if the buyer goes past their 17 days and still has not signed off the contingency removal, they are entitled to cancel and still keep all of their deposit.
Let’s now imagine the buyer has signed off on all contingencies, and you the seller are within your legal right to keep the buyers’ deposit. There is still one more hurdle to cross. The buyer has to give escrow permission to give you their money. If they refuse, you’ll have to go to mediation or Court to get that money. You as the seller will win, but it will take time, and you are NOT allowed to sell the home to anyone else while this is going on.
As you can see, it’s tough to keep a buyers Earnest Money Deposit here in California - even if you’re doing everything right. The best course of action is always avoid these issues early on an CLOSE ESCROW.
MIKE DOYLE | DRE 01758185
☎️949-322-9934 📧 [e-mail]