Most offers in San Carlos start out the same way. The buyer offers to put three percent of the agreed upon purchase price into the escrow account. Many buyers are told that if they back out during the contingency period, their three percent deposit will freely flow back to them from the escrow company. It’s not exactly this simple and there are some definite pitfalls that buyers should be aware of.
The Good Faith Deposit
It goes by a variety of names, but the three percent deposit is generally called a good faith deposit or an earnest money deposit. Generally, once a contract is accepted, the buyer has three business days to deposit their good faith deposit into the agreed upon escrow account. A personal check is acceptable (unless contractually stated otherwise) and the check will be cashed immediately by the escrow company.
If the buyer makes his or her offer contingent on something similar to obtaining financing, approval of the property condition, or perhaps the sale of the buyer’s home, the buyer is supposedly protected against losing their deposit if the contingency is unable to be lifted by the prospective buyer in the time period allowed in the contract.
The most common scenario would be: a buyer and seller agree on a a contract. The buyer places his or her three percent deposit into an escrow account. The buyer then conducts a property inspection and discovers items that were previously unknown and wishes to back out of the contract. Using the property inspection contingency protection that was built into the contract the buyer informs the seller of their intent to cancel and expects their three percent deposit to be returned to them. Here is the key fact in this situation: the deposit will not be released back to the buyer without the seller’s written authorization to the escrow company. If you have a seller who is ticked off, unreasonable or believes that the buyer is backing out for a reason that is less than material, they will have the ability to hold up the return of the deposit to the buyer and even put the return of the deposit under a more formal legal dispute, if the seller believes they have legal standing to do so.
The vast majority of sellers will not fight the buyer’s need for their permission to release the deposit if the reason given by the buyers is material and falls under one of their contingencies in the contract. Most sellers understand that until that deposit is released back to the buyer, their home is still under contract to a buyer who is not going to buy it. In the mean time, their home is losing valuable market time.
There are a variety of reasons why buyers may put more or less than the three percent deposit into escrow. Depending on the strategy being used by the buyer and their agent, sometimes buyers will go much higher than three percent, and other times the deposit may be closer to one percent. If you are going to put down a deposit of more than three percent, I would highly recommend drafting a clause that states the deposit will freely flow to you, without the need for a seller’s signature, provided you give adequate written notification to the seller for the withdrawal. Clauses such as these can be tricky to draft, but well worth it to protect your deposit.