Is The Earnest Money Deposit Refundable in California?

What is The Earnest Money Deposit?

Also, called the “EMD,” this is a good-faith deposit the buyer places into escrow at the beginning of the transaction. This gesture shows the buyer’s seriousness and is also at risk of being lost if the buyer breaches contract. A typical earnest money deposit is 1% to 3% of the sales price.  The EMD is not refunded but rather applied to the funds needed to close escrow. For example, if the down payment of the purchase price is $100,000 then the buyer will just need to give escrow $90,000 before closing. This is because there is already a $10,000 deposit sitting in escrow.

Can I get My Earnest Money Deposit Back?

In California, the standard residential purchase agreement has buyer contingency periods. This is a certain amount of time allocated to the buyer to perform inspections or gets a loan. For example, you have 17 days from acceptance to do property inspections. If you decide the property requires too much work then you can cancel in that timeframe and are entitled to a refund of your earnest money deposit. Basically, a good rule of thumb is that if you cancel within any contingency period, your earnest money deposit is refundable.

What Happens If I Cancel After Contingency Periods?

Let’s continue our example where you’re a buyer. Now imagine all your contingencies run out on day 21. Then on day 22 you decide to cancel. Is your earnest money refundable? Maybe, I will explain. The standard in California is that the buyer must remove contingencies in writing or else they stay in effect. So, even if your longest contingecy period expires on day 21 after acceptance, it will continue indefinitely until you send the seller a written removal of contingencies. This means that as long as you didn’t remove your contingencies, your earnest money deposit is refundable.

What If I Remove Contingencies and Cancel?

Once you remove your contingencies it is assumed that your deposit is non-refundable. If you try to back out, the seller will likely ask you to surrender your deposit. If you refuse, the seller can make a claim or even take you to court to get an order for escrow to release the deposit as “liquidated damages.” The contract has a section that states the seller can keep the deposit up to 3% of the sales price as penalty for the buyer’s breach. Now, this doesn’t happen that often. Usually the parties will negotiate a reduced fee, like the seller might get half the earnest money deposit. Often the seller will not want the hassle and just refund the earnest money deposit so that they can move on with a backup buyer.

How Do I Get The Deposit Out of Escrow?

A seller that feels entitled to the deposit or a buyer that feels a refund is deserved will try to get escrow to release the deposit. Escrow cannot release the deposit without instructions signed by both the buyer and seller or  a court order from one of the parties. If one party cancels due to the other party’s breach, they can demand the deposit. The purchase contract stipulates that a party can send a demand to release to escrow, and then escrow will give that demand to the other party. If the other party does not object to the demand to release deposit adfter 10 days, then escrow can release the deposit to the party that made the demand. Most parties will dispute the other party’s demand. This means the parties eather have to negotiate an agreement to release the deposit or escalate the matter to mediation/arbitration, or court.

What Happens If The Seller Refuses to Release The Buyer’s Deposit?

Neither party is allowed to hold the earnest money deposit in bad faith. This means that without a valid, reasonable claim the deposit should be released as soon as possible. Unless their is a good-faith dispute, a party must return the deposit within 30 days of receiving a written demand from the other party. Failure to return the deposit can result can result ina  civil penalty up to $1000 per California Civil Code § 1057.3.