Earnest Money in Real Estate: What You Need to Know

Earnest Money in Real Estate: What You Need to Know

In California real estate transactions, earnest money serves as a good-faith deposit to demonstrate a buyer’s commitment to purchasing a property. While it can strengthen an offer, buyers must understand when earnest money is refundable, when it becomes non-refundable, and how to protect their rights under the contract.

At Alex Knaub & Associates, we are a California law firm dedicated to protecting buyers and sellers in real estate transactions. Whether you need legal guidance on your purchase agreement, help resolving an earnest money dispute, or assistance negotiating contract terms, our team ensures that your rights are safeguarded throughout the process.

What Is Earnest Money?

Earnest money is a deposit made by a buyer when submitting an offer on a property. It shows serious intent to follow through on the purchase. This deposit is not paid directly to the seller but is instead held in escrow by a neutral third party, such as a title company or escrow service.

If the transaction closes, the earnest money is applied toward the buyer’s closing costs or down payment. However, if the deal falls through, the fate of the deposit depends on the terms of the contract and whether contingencies were met.

How Much Earnest Money Is Required in California?

In California real estate transactions, the standard earnest money deposit ranges from 1% to 3% of the purchase price, but this can vary depending on the market.

For example:

  • On a $800,000 home, the earnest money deposit is typically $8,000 to $24,000.
  • In competitive markets like Los Angeles, San Francisco, and San Diego, buyers may offer 5% or more to make their offer more attractive.
  • Some sellers or new home builders require a fixed deposit amount, making it important to review contract terms carefully.

When Does Earnest Money Become Non-Refundable?

California law allows buyers to include contingencies in their purchase contract that protect their deposit. However, earnest money can become non-refundable under certain circumstances:

Earnest Money Is Refundable If:

  • The buyer cancels within the contingency period, such as during the home inspection, financing, or appraisal review.
  • A contract contingency is not met, such as the inability to secure financing or a failed home inspection.

Earnest Money May Be Non-Refundable If:

  • The buyer waives contingencies and later backs out of the contract.
  • The contingency period expires, and the buyer has not taken action.
  • The buyer cancels for a reason not covered by the contract.

In California, once contingencies are removed in writing, the seller may be entitled to claim the earnest money if the buyer fails to proceed with the purchase.

Where Is Earnest Money Held in California?

Earnest money is not paid directly to the seller. Instead, it is held in an escrow account managed by:

  • A title company
  • An escrow company
  • A real estate brokerage

This ensures that the deposit is protected and only released according to the contract terms. If a dispute arises over the deposit, legal intervention may be necessary to determine whether the buyer or seller is entitled to the funds.

What Happens If the Deal Falls Through?

If a transaction is canceled, the handling of the earnest money depends on why the deal did not close:

Earnest Money Is Returned to the Buyer If:

  • The cancellation is due to an unmet contingency, such as a failed inspection or financing denial.
  • The seller fails to meet a contractual obligation.

Seller May Keep Earnest Money If:

  • The buyer waived contingencies and later backs out.
  • The buyer fails to perform under the contract, such as missing deadlines.

Disputed Earnest Money Deposits

If a buyer and seller disagree over who is entitled to the earnest money, legal action may be required. Alex Knaub & Associates represents clients in real estate contract disputes and ensures their rights are enforced under California law.

Protecting Your Earnest Money in California

To avoid losing your deposit:

  • Work with an experienced real estate attorney to review your contract before signing.
  • Ensure all contingencies are clearly stated to protect your deposit.
  • Pay close attention to contract deadlines to avoid unintentional forfeiture.
  • Get everything in writing, especially any agreement to extend deadlines or modify contract terms.

Get Legal Help for Your California Real Estate Transaction

Earnest money is a crucial part of California real estate transactions, and understanding your legal rights can prevent costly mistakes. Alex Knaub & Associates is a California law firm that helps buyers and sellers with real estate contracts, escrow disputes, and earnest money claims.

If you need legal assistance with an earnest money dispute or real estate contract, contact Alex Knaub & Associates today. Our team is ready to protect your interests and provide expert legal guidance throughout the process.