When is the Seller Entitled to the Buyer’s Good Faith Deposit in a Real Estate Transaction?

When is the Seller Entitled to the Buyer’s Good Faith Deposit in a Real Estate Transaction?

A Good Faith Deposit is the amount of money that the buyer offers to place into an escrow account (Title Company) once the offer has been accepted by the seller. This deposit goes towards the purchase price and can be released back to the buyer only if some of the contingencies have not been removed. In the event that both buyer and seller have removed all the contingencies, the seller may be entitled to the amount of the deposit, usually also referred as ” liquidated damages.”

 What Are Contingencies?

The California Real Estate Association of Realtors states that; ” Under contract law, a contingency provides a party to the contract the ability to condition performance on the occurrence or non-occurrence of another event.  For example, a buyer may condition performance under a real estate purchase contract on the outcome of the buyer’s inspection.  If the buyer is dissatisfied with the results of the inspection, then the buyer may cancel the contract without being held in breach of contract.  Another common example:  the buyer under a real estate purchase contract may condition performance on obtaining a specific loan.  After making a good faith effort to obtain such a loan, if the buyer is not approved for such a loan, then the buyer may cancel the agreement without being held in breach of contract.  A buyer of vacant land may want a contingency on city approval of building plans.”

 

There are other types of contingencies. For instance, the appraisal contingency, which means that the home value appraised must be no higher than the purchase price. Another example is that the home must be insurable. In some areas in our beautiful Golden State is becoming increasingly difficult to obtain fire insurance. In Tuolumne County alone, the average monthly fire insurance is between $200-$300/month,. Unfortunately, this is pricing buyers out of the market and scaring many away from these areas.

Finally, often times the seller needs to find replacement property. Either a rental or purchase another home. This is a great example of a seller’s contingency.

 

How Can These Contingencies be Removed?

The contingencies can only be removed in writing. Whether it’s a buyer’s or seller’s contingency removal of a specific item such as; inspections, insurability, preliminary title report or removal of ALL Contingencies, must be done in writing within the time frame prescribed on the contract. The same applies to the seller. If the Seller needs to identify replacement property the contingency removal will also need to be writing, meaning the seller has found replacement property. If the seller has not found replacement property, then the time can be extended if both parties agree. The buyer also has the option to request an extension if more time is needed for inspections, appraisal or loan processing.

What happens if all the buyer’s contingencies are removed and buyer cancels the agreement?

The seller will be entitled to the good faith deposit.

Can the parties agree in advance that the buyer will pay a non-refundable deposit in the event of breach?

According to the California Association of Realtors; “the law does not permit contracts to impose penalties or forfeitures, including a non-refundable deposit, for breach absent gross negligence, willful or fraudulent breach. (Civil Code Section 3275). In general, judges are reluctant to enforce penalty or forfeiture clauses where they bear no realistic relationship to the actual damages incurred. Moreover, courts have found that any provision in a contract by which money or property would be forfeited “without any regard to the actual damage suffered would be an unenforceable penalty.” (Freedman v. The Rector, Wardens & Vestrymen of St. Matthias Parish (1951)).

Additionally, the RPA-CA’s language does not permit such clauses. Under paragraph 21A of the RPA-CA, any added clause specifying a remedy for a buyer breach such as a non-refundable deposit or a forfeiture of the deposit will be invalid if the added clause does not independently comply with the Civil Code’s liquidated damage rules. ”

Can a seller ask for the deposit to be released before close as a condition of accepting an extension?

According to the California Association of Realtors Legal Member services the short answer is Yes. “The most common circumstance in which a deposit is released is pursuant to a negotiation for an extension of escrow. At that time, sellers who want the buyer’s deposit released in the event of default may offer an extension. At the same time, it is recommended that the buyer be required to remove all contingencies. The deposit released should be the amount that was in fact placed into escrow pursuant to the purchase agreement and should be no more than 3%. However, releasing a buyer’s deposit to the seller is not the same as allowing the seller to keep the deposit.”

I hope you find this information helpful. If you wish to seek legal advise, please consult an attorney.