Real Estate Purchase Deposits: 7 Common Buyer/Seller Questions

If you’ve ever bought a house, you might be familiar with real estate purchase deposits. But, you may not be familiar with the important details about how they work. If you’re a first time buyer, or it’s been awhile since you’ve bought or sold property, make sure you understand how real estate purchase deposits work before contracting to buy real estate. As San Francisco real estate attorneys, here are some common questions we receive about real estate purchase deposits in California. 

1. What are real estate purchase deposits?

When buyers contract to purchase property, real estate purchase deposits indicate “good faith” to sellers. It demonstrates that a buyer intends to complete the transaction on the date specified in the contract. It helps sellers make sure they’re dealing with serious buyers. With offers coming in from many potential buyers, sellers want to avoid contracting with someone who doesn’t fully intend to follow through with the purchase.

This is why real estate purchase deposits are also known as an “earnest money” deposits. 

While providing an earnest money deposit is not technically required, providing a deposit can help an offer stand out and secure the sale.

2. Are real estate purchase deposits the same as down payments?

A purchase deposit is not to be confused with a buyer’s down payment. A purchase deposit demonstrates a buyer’s good faith to the seller and are credited back to the buyer at the close of escrow. The down payment is a lender requirement.  The lender determines the amount of down payment based on the type of financing. The down payment gives the lender more faith in your ability to repay the loan. For instance, the lender may require a buyer to put ten or twenty percent down against the loan amount. Those funds are separate from the earnest money deposit.

3. What is the required amount for real estate purchase deposits in California?

In California, the minimum deposit amount is negotiable. There is no law that states a required amount for an earnest money deposit. Essentially, the customary deposit amount varies depending on the local real estate market. 

Usually, the more competitive the market, the higher the deposit. Buyers may need to provide more money to get the attention of sellers in San Francisco or San Jose than they would in less competitive markets.

As a general rule, the average purchase deposit in California can range from one to three percent of the purchase price. In less competitive markets, earnest money deposits may be a flat amount. So, the expected earnest money deposit depends on the area, and how competitive the market is.

The California Residential Purchase Agreement is the standard document that buyers and sellers use for residential purchases in California. The exact amount of the deposit is specified on this form.

4. When do buyers pay real estate purchase deposits?

In most cases, purchase contracts in California allow buyers three days to provide a deposit to the escrow holder. The exact due date for real estate purchase deposits is negotiable and is specified in the purchase agreement.

5. What happens to the money once the buyer submits the deposit?

Buyers do not give real estate purchase deposits directly to sellers. In most cases, a buyer gives a cashier’s check to a real estate agent who then places it in escrow for safekeeping during the transaction. The earnest money deposit is essentially an advance payment that goes toward the final purchase price. In a sense, the buyer is prepaying a portion of the purchase price before completing the sale. At the close of escrow the deposited amount is applied to the buyer’s down payment or other purchase costs.

6. Are real estate purchase deposits refundable?

Real estate purchase deposits are generally refundable if a buyer has a legally-valid basis for cancelling or rescinding a contract. However, a buyer may receive a partial refund or no refund at all depending on the terms and conditions of the contract. If a buyer fails to meet the obligations of the contract, the seller and other third parties may have a right to some or all of the deposit. Before entering into a purchase agreement, it’s important that buyers understand what actions may cause them to lose their earnest money deposit. The question of whether a buyer can get the deposit back after cancelling a real estate purchase depends on the specific terms and conditions of the contract, and the facts of the individual transaction

During the escrow period, there is usually a contingency period to work out the details of the sale. This period is negotiable, but it’s usually twenty-one days. This gives the buyer and seller time to work out the details of the sale. 

During the contingency period, buyers should complete all property inspections, appraisals and due diligence. They must also make sure they can obtain the necessary financing. In like manner, sellers must make sure to provide all disclosures on the condition of the property.

Exercise Good Faith

The contingency period may give the buyer the right to cancel the purchase. However, the buyer must act in good faith. For example, if there is a financing contingency, the buyer could only use that as a basis for cancellation if the buyer made good faith and reasonable efforts to obtain financing, and was unable to get it.

If the buyer lawfully cancels the sale within the contingency period, the seller will return the deposit to the buyer’s escrow account. 

At the end of the contingency period, sellers usually require buyers to “remove contingencies” in writing and waive their right to a refund of their deposit. 

If the buyer decides to back out after signing the contingency removal, the buyer may well forfeit the deposit. However, if the buyer can prove valid grounds to rescind the contract (e.g., fraud), or can prove that the seller can quickly resell the property for the same price or higher, the buyer should be entitled to recover at least part of the deposit.

7. What happens if there is a dispute concerning real estate purchase deposits?

After the party who wishes to cancel sends a Notice of Cancellation, the buyer and seller will try to negotiate a resolution through their real estate brokers or attorneys. If they cannot come to an agreement, most purchase agreements require that they try to settle the dispute with the assistance of a mediator. If mediation is not successful, the parties would then normally be required to submit the dispute to an arbitrator. The arbitrator makes a binding decision about the disposition of the deposit funds, and awards legal expenses to the winning party.

In the event of a dispute, the escrow holder will keep the earnest money deposit funds for a period of time. If there is a filing of action, the escrow holder will deposit the amount that is in dispute with the court where the action is filed. 

If you need assistance with a potential real estate purchase deposit dispute, or other type of dispute, contact Steven Adair MacDonald & Partners at 415-562-0504.