I just signed an offer to purchase a home, and I am not quite clear about what happens to my deposit. What if I find out there is something wrong with the house, or I cannot get the loan that I want? At what point can I have my deposit returned to me? Will the seller be able to keep my deposit?


Congratulations on finding yourself a new home! Your ability to have your initial deposit (it is commonly referred to as an “earnest money deposits” or EMD) returned to you depends on the terms of the contract that you sign with the seller. For the purposes of this post, I will limit my comments to the most common form of residential real estate contracts in California: the California Residential Purchase Agreement and Joint Escrow Instructions (commonly referred to as an RPA).

The RPA is provided by the California Association of Realtors to its licensed broker and agent members. It is designed for a buyer to present an offer to a seller and defines all of the terms of the transaction. Included in the RPA are the amount of the EMD, purchase price, loan amount, closing date, what costs are to be paid by the buyer and/or seller at closing, and finally, establishes contingency timeframes.

The RPA defaults to standard timeframes that can be negotiated by the parties to be a shorter or longer period of time. A buyer has a certain number of days to determine that the condition of the home is acceptable (home inspection), that the property appraises for the purchase price and a number of other contingencies. Reviewing the RPA will inform you of the timeframes included in your transaction, but an example is the appraisal contingency (Item 3:I of the RPA), which defaults to 17 days from the seller’s acceptance of the buyer’s offer, including any counter offers.

The contingency periods give the buyer a safe harbor in which they have the ability to cancel a transaction and get the EMD returned if the buyer disapproves of a particular condition. “Removal” of a contingency means that the buyer gives the seller written confirmation that they are satisfied with the particular condition, and are committed to completing the purchase.

The RPA does not contain any provisions for “silence deems approval.” This means that even when the timeframe has ended, the contingency remains until removed by the buyer. Once the contingencies have been removed by the buyer, if the buyer fails to complete the purchase, the seller may be entitled to keep the buyer’s EMD.

Note that there is no automatic release of a buyer’s EMD from escrow to the buyer or the seller when an escrow cancels. This is true if the escrow cancels before or after contingencies are removed by the buyer. In all cases, to release an EMD from escrow, a written agreement (cancellation instructions), a judicial decision or an arbitration award (see paragraph 14:H of the RPA) is needed. If a buyer exercises their right to cancel based on a contingency (for instance a negative report from a home inspector), the deposit will remain in escrow until the buyer and seller have signed cancellation instructions.

A seller has a right to enforce the timeframes by requesting that their buyer remove contingencies at the end of each timeframe. When a buyer fails to remove contingencies when requested, the buyer is considered to be “in default,” and the seller can then request to cancel the escrow.

As a buyer, it is important to stay mindful of the deadlines included in the purchase agreement by promptly applying for their loan, conducting inspections, etc. to avoid delays in closing.

Good luck to you and your family in your new home!

Cynthia Moller