CA Buyer in Default Refusing to Release Earnest Money

Buying & Selling Real Estate
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CA Buyer in Default Refusing to Release Earnest Money

James Haig Streeter
Investor · San Rafael, CA · Member since 2016 · 5 posts · 1 vote

I recently sold my CA home, with the initial accepted offer being 7% over asking, with all contingencies removed from the outset. After paying the standard 3% earnest money into Escrow the buyer then cancelled the contract and demanded the deposit back. This is even though the California Purchase Agreement has a liquidated damages clause that states if the buyer defaults the seller “shall retain the deposit”. The buyer also signed a contingency release which has similar language.

I finally sold to a backup offer, for asking price – therefore a 7% loss compared to the initial offer. As this home is located in the SF Bay Area this represents quite a substantial sum.

Question: As the buyer who was in default is refusing to sign the release of the earnest money, are there any next steps I can take to compel them to sign? I understand that often this situation ends with an agreement for each party to take a 50/50 split. Any other options that anyone can suggest, keeping in mind this is a CA contract?

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Jon Schwartz
Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
5y
Originally posted by @James Haig Streeter:

I recently sold my CA home, with the initial accepted offer being 7% over asking, with all contingencies removed from the outset. After paying the standard 3% earnest money into Escrow the buyer then cancelled the contract and demanded the deposit back. This is even though the California Purchase Agreement has a liquidated damages clause that states if the buyer defaults the seller “shall retain the deposit”. The buyer also signed a contingency release which has similar language.

I finally sold to a backup offer, for asking price – therefore a 7% loss compared to the initial offer. As this home is located in the SF Bay Area this represents quite a substantial sum.

Question: As the buyer who was in default is refusing to sign the release of the earnest money, are there any next steps I can take to compel them to sign? I understand that often this situation ends with an agreement for each party to take a 50/50 split. Any other options that anyone can suggest, keeping in mind this is a CA contract?

James,

I believe the next step is mediation. Read section 21 of the CA Residential Purchase Agreement (assuming you transacting on this document).

I've not been through mediation or arbitration myself, but if the buyer removed all contingencies when he submitted the offer, then cancelled, AND you suffered actual damages (a subsequently reduced sale price), your case seems pretty iron-clad to me.

I believe you can enter mediation and arbitration without a lawyer, so I say go for it! Keep you costs down and fight it!

Best,

Jon

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    5y

    Sounds like you got most of what you needed on this property sale.  Tell the defaulted buyers you don't need the money and are willing to wait a decade to get the funds you are legally entitled to have.  Then see if they will take 25% back and you keep the rest.

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  • Jon Schwartz
    Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
    5y
    Originally posted by @James Haig Streeter:

    I recently sold my CA home, with the initial accepted offer being 7% over asking, with all contingencies removed from the outset. After paying the standard 3% earnest money into Escrow the buyer then cancelled the contract and demanded the deposit back. This is even though the California Purchase Agreement has a liquidated damages clause that states if the buyer defaults the seller “shall retain the deposit”. The buyer also signed a contingency release which has similar language.

    I finally sold to a backup offer, for asking price – therefore a 7% loss compared to the initial offer. As this home is located in the SF Bay Area this represents quite a substantial sum.

    Question: As the buyer who was in default is refusing to sign the release of the earnest money, are there any next steps I can take to compel them to sign? I understand that often this situation ends with an agreement for each party to take a 50/50 split. Any other options that anyone can suggest, keeping in mind this is a CA contract?

    James,

    I believe the next step is mediation. Read section 21 of the CA Residential Purchase Agreement (assuming you transacting on this document).

    I've not been through mediation or arbitration myself, but if the buyer removed all contingencies when he submitted the offer, then cancelled, AND you suffered actual damages (a subsequently reduced sale price), your case seems pretty iron-clad to me.

    I believe you can enter mediation and arbitration without a lawyer, so I say go for it! Keep you costs down and fight it!

    Best,

    Jon

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y

    as mentioned above there should be boiler plate mandatory mediation for these circumstances.. but as long as U dont sign the release the money just sits in title company account.. after some time with no resolution  ( At least in OR and WA which usually is very close to CA) money is then interpleaded to the courts for disposition then you both lawyer up.. 

    these rarely go that far as lawyer fee's exceed the amount your arguing about.

    but splitting the baby in some manner is for sure a very common outcome if you dont want the drama.

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  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    I could be wrong,.....but I usually do not hear about these types of questions unless it's from a FSBO. Now if you did use a Realtor to represent you, then I would most certainly be asking them and their broker about this.

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    5y

    I experienced this once on a business sale (as a buyer) We ended up splitting it (even though the owner was cooking the books and we discovered it, hence the backing out of escrow)

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  • James Haig Streeter
    OP
    Investor · San Rafael, CA · Member since 2016 · 5 posts · 1 vote
    5y

    Thanks for all these replies. This was not a FSBO and our realtor even reminded the buyer's realtor in writing that their client would lose the earnest money before they formally cancelled. So all seems pretty iron-clad. I think I will sit on it a bit longer (maybe not a decade!) and see what they will accept. They are currently demanding all the money be released!..

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