A lot of buyers wonder why the Earnest Money Deposit is 3%. Paragraph 25 of the residential purchase agreement, Liquidated Damages clause is the reason it is 3%. Liquidated damages protects the buyer in the event that they default. With this provision, the maximum damages the seller can seek from buyer due to non performance (only after ALL contingencies have been removed) is 3% of the purchase price. If Liquidate Damages is not initialed the damages the seller could claim are unlimited. I recommend for buyers to always initial this provision.
Many buyers are worried about putting their Deposit in Escrow, because if they don’t purchase the property they are afraid that they will lose it. The California state purchase agreement is very bias towards the buyer and has a lot of protection for buyers, so you shouldn’t worry.
There are 3 scenarios that can happen with your EMD
1. Wrote offer but not accepted
Earnest Money is never deposited with escrow
2. Wrote an offer, offer was accepted, but cancelled during contigency period
Earnest was deposited with escrow, and then returned to buyer (Buyer may incur costs of any inspection fees, a loan appraisal fee, and an escrow cancellation fee)
3. Wrote an offer, offer was accepted, contigencies were removed, buyer breaches contract and doesn’t complete purchase.
Seller may retain the Earnest Money deposit as liquidated damages. Make sure you are absolutely certain you will buy the property before you removal ALL contingencies. The first contingency to be removed is usually the inspection contingency, followed by the appraisal contingency, and finally the loan contingency. Don’t remove the loan contingency until you have final loan approval from your lender.