What is an Initial Deposit?

If you’re buying or selling a home in Southern California sometime soon, you’ll likely have to deal with the Initial Deposit.

The initial deposit is a negotiated amount to pay and to be held in escrow when the buyer and seller have reached an agreement on the sale of a property. It’s usually 1-3 percent of the purchase price, the latter being more common here in Souther-California. The initial deposit constitutes a “good-faith” gesture that after you have paid the deposit, you will not continue looking for other homes.  But besides this fact, there are other things a buyer should know about the initial deposit than the ones stated above, and this blog is going to answer your questions. 

Is it required to pay the seller earnest money?

It is not required. Earnest money is not required according to the rules of California real estate, but it is legal to offer to the seller. Many of the properties being offered for sale in Southern California are experiencing multiple offers from buyers all competing to get their hands on a dream home. It’s why many offers are being presented with an initial deposit of 3%. Buyers showing this kind of good faith will be more likely to leave an impression on the seller which can be one of the deciding factors.

Can I get the money back?

There are a few ways to get it back:

1)The initial deposit will go directly towards the purchase price at the close of the sale.

2) The purchase agreement spells out the contingencies upon which the buyer can cancel the deal and have the money returned. Certain circumstances like findings during the inspection, a problem with the appraisal, or the buyer’s inability to secure financing may all be contingencies that allow the buyer to cancel the transaction. At the same time, if the buyer does not remove these contingencies in writing during the time specified in the purchase agreement, the seller has the right to cancel the transaction and the initial deposit will be returned to the buyer.

3) Seller is unable to secure another property for themselves. In the event that the seller has a contingency in place to find a replacement property and is unable to close on their new home, they can cancel the deal in writing, and the deposit will be returned.

What happens to the money at closing?

The initial deposit provided by the buyer is held in escrow and will be applied directly towards the purchase price (or other associated costs) at the close of the sale. Escrow will factor in the whole initial deposit into your closing costs and downpayment.

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To get a better understanding of the initial deposit and how it works you can review the California Residential Purchase Agreement.

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If you have any questions or concerns about the initial deposit or anything else related to real estate, feel free to call me at 323-497-2596

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