An Approach to Sacramento Home Buyer’s Earnest Money Deposit

Bag with money dollarsAttitudes toward buyers’ earnest money deposits in California have changed over the years. It’s no secret that the purchase contract in California is tilted a bit more in the buyer’s favor than the seller’s but that’s probably because the party most likely to call a lawyer is the buyer. After the escrow closes, generally the sellers have their money — which can make almost anybody, except Donald Trump, a satisfied party. The buyers, on the other hand, are stuck with this monstrosity and screwed 12 ways from Sunday.

But in the beginning, in the dawn of mankind and womankind, when the sun is barely breaking over the horizon, is the earnest money deposit: the money the buyer puts into escrow to show good faith. That money is at risk, and buyer’s worry mostly about losing it. They want to protect their earnest money deposit and get it back if the transaction goes south. They ask what happens if the offer is not accepted or what happens if they can’t get a loan. Pre-approvals are pretty much worthless, btw.

Buyer’s agents, in an attempt to help protect their buyers, will typically include a handful of contingencies in the purchase contract. A contingency means the buyer has the right to demand the deposit back and cancel. Until those contingencies are released, the buyer typically can cancel the contract, depending on the type of contingency.

With the new C.A.R. forms of November 2014, the buyer’s contingency period for the loan has been extended from a default period of 17 days to 21 days. If the buyer releases the loan contingency and cannot close, that puts the buyer’s earnest money deposit at risk — it lets the seller try to claim it as damages. And therein lies the difficult situation.

Sellers might read the purchase contract and conclude that they are automatically entitled to the earnest money deposit in the event of the buyer’s default. But in the real world, if the buyer refuses to release it, they are at a standstill. If there is no mutual agreement regarding the release, the seller might need to seek satisfaction through a Small Claim’s Court action. Plus, the seller is not really free to sell the home to anybody else until this situation is resolved. In many cases, it’s just not worth the expense and effort to pursue the earnest money deposit.

There is also hope now with the Seller Demand to Release Deposit, that came out in November of 2014. If the escrow company agrees, and the seller is entitled to the deposit, the seller can sign this form, which allows the escrow company to disperse the funds on deposit, subject to certain terms.

Disclaimer: All parties should obtain legal advice regarding disputes over the earnest money deposit.

Subscribe to Elizabeth Weintraub\'s Blog via email

Sorry we are experiencing system issues. Please try again.