What does an earnest money deposit and an engagement ring have in common?

The earnest money deposit is a critical part of the home buying process.  Once deposited with escrow, your earnest money proves to the seller that you are moving forward. It’s similar to an engagement ring- it’s a sign of good faith.

In our Southern California real estate market, the customary earnest money (good faith) deposit is 3% of the purchase price. Once your purchase offer is accepted by the seller, the earnest money is delivered (wired, etc.) to escrow.  In most instances your deposit is refundable in the event certain things don’t pan out. Most California real estate purchase contracts are written with contingencies, such as:

*After inspections, you are satisfied with the condition of the home

*You are able to obtain financing

*The home appraises for at least the amount of the purchase price 

If your offer to purchase included contingencies like the ones mentioned above, you have the opportunity to request a refund of your earnest money if you fail to meet a contingency, such as being unable to secure a loan.

How do you get your earnest money refunded?

Sometimes escrow will charge a minor cancellation fee in the event of the cancellation of escrow. But what happens to the remainder of your deposit? This is where things can get dicey:

Escrow is an independent neutral third party and they cannot unilaterally cancel escrow or refund a deposit. In order for escrow to release the buyer’s deposit they require signed cancellation instructions detailing how to handle the deposit.  AND all buyers and sellers must sign the instructions.

 In the event that the buyer and seller do not agree as to how the deposit refund will be handled, escrow cannot release any portion of the deposit to either party. In this instance buyer and seller typically go to arbitration or hire an attorney.

Another benefit of working with an experienced real estate agent is that they can hopefully help you with negotiations so that you don’t need to hire a real estate attorney or arbitrator.

Read more about earnest money deposits here: Ouch! Three Times You Can Kiss Your Earnest Money Goodbye