Buyers usually want to know how much to put down for an earnest money deposit.  There isn’t a set requirement, but in California contracts but include an amount, but that can be as little as one dollar.

What is an Earnest Money Deposit?

A good faith deposit is not the same as a down payment for a house.  Instead, it’s the money put forth when buyers execute a purchase contract which specifies how much the buyer is willing to initially put up to secure the contract to show “good faith”.  The earnest money will convey to the seller “I’m a serious buyer”.

So, How much money is good enough to put down?

There isn’t a set amount but deposits usually range from 1 to 3 percent of the sales price.  Buyers usually won’t put down more than 3% since most sign a liquidated damages clause which limits the seller to 3% of the purchase price as damages in the event of a default.  The deposits are refunded to the buyer and credited towards closing at the end of escrow.

In a seller’s market, it makes more sense for the buyer to put down a much larger earnest deposit to entice the seller to accept the offer.

Be Careful with whom you Give your earnest money to

Don’t give your money to a broker or anyone that esn’t a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company.  Make sure to verify that the 3rd party will deposit funds into a separately maintained trust account and obtain a receipt.  It is very inadvisable to authorize a release of your earnest money until the transaction is closed.

Is your earnest money deposit refundable upon cancellation?

Read your contract.  Laws can vary state to state.  In California, standard C.A.R. purchase contracts allow for the return of the earnest money deposit to the buyer within a specific time period, which is by default 17 days…should the buyer decide to cancel the transaction.  If the seller refused to return the deposit without cause, the seller could end up paying a $1,000 civil penalty to the buyer.

When ready to cancel, both the seller and buyer need to sign the mutual release form.  If an agreement isn’t reached, the party holding the earnest money will continue to hold it until an agreement is reached.  If no agreement is reached after a few years, escrow parties will send both parties a certified letter asking for instructions.  If nobody responds, the money will be refunded to the buyer.  If the seller contests the action, the escrow money is send to the state of California to help balance the budget deficit.