California real estate is expensive, so earnest money deposits can be tens of thousands of dollars. Potentially losing or gaining that money without a sale going through is a high-stakes game that may involve lawyers. If you’re buying or selling a house, learn more about this issue so you can try to prevent it from becoming a problem
What is an Earnest Money Deposit?
Also referred to by its abbreviation, EMD, this is a deposit (usually one to three percent of the sales price) the potential buyer puts into escrow to show they’re serious about the property. They want time to inspect the property, finalize financing, and decide whether to buy or not.
In exchange for taking the property off the market, the potential buyer pays the EMD. The EMD is applied to the down payment if the parties agree to a sale. Problems arise when the potential buyer decides not to purchase the property.
What Causes EMD Disputes?
Timing, in most cases, is everything.
The standard California residential purchase agreement has buyer contingency periods (see pages two, eight, and nine). These time frames allow the buyer to inspect the property and get their financing squared away. If you have 21 days from acceptance to perform property inspections and decide if the home is in good enough shape to buy. If not, and you cancel within this period, you’re entitled to a refund of your EMD.
If you decide to cancel on day 22 or later, you may or may not get your EMD back. You must remove contingencies in writing, or they’re effective. As long as you didn’t remove them, your EMD should be refunded.
If you remove the contingencies, it’s presumed the EMD is non-refundable. If you try to get out of the agreement, the seller will probably ask you for your deposit. The contract contains language stating the seller can keep the deposit up to 3% of the sales price as a penalty for the buyer’s breach. If you refuse, the seller may claim it or go to court for an order that the escrow agent release the deposit as “liquidated damages” to your breach of contract.
Contingencies protect the buyer and present potential obstacles to a sale. The more contingencies there are, the less attractive the offer. If the market favors sellers (as it does now) as part of the negotiations, the potential buyer may need to waive all or some contingencies to have an opportunity to buy the property.
Given the cost and hassle involved, usually, the parties avoid legal action and protracted disagreements by negotiating an amount the seller can keep. The seller may release it all and not want to bother, especially if another buyer is lined up.
How Do I Get the EMD Out of Escrow?
If one party feels they should have the deposit, they will request it from the escrow agent. It can be released with:
• Instructions signed by both parties
• A court order obtained by one of them
If one party cancels the contract due to the other’s breach, they can demand the deposit. They send a demand to the escrow agent to release the funds, and the agent sends it to the other party. If they don’t object after ten days, the money’s released to the party making the demand.
Most parties accused of a breach will dispute the demand if the process reaches this point. The parties must either negotiate a resolution to release the deposit, or the matter will go to mediation, arbitration, or court.
Neither side can claim the earnest money deposit in bad faith. Unless there’s a bona fide dispute, the deposit must be returned within 30 days of receiving the other party’s written demand. Failure to do so can cost you a civil penalty of up to $1000 under state law.
We’re Here to Help
Whether you’re a buyer or seller, an EMD dispute can turn heated. Being accused of something underhanded or violating a contract becomes emotional for many people. We help people see the situation as it truly is and advise them of the law and their best options. We represent parties to help them resolve these disputes and litigate them when necessary.
If you have questions about your rights and responsibilities or need legal representation, call Anthony Burton at (949) 244-4207 or complete our online contact form today.
